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CURRENCY 


THE   FUNDAMENTAL  PRINCIPLES 


MONETARY    SCIENCE 


POSTULATED,  EXPLAINED,  AND   APPLIED 


"  Et  sanguis  et  spiritus  pecunia  mortalibus" 

"  It  is  absurd,  in  any  science  to  follow  a  mere  written  rule.  .  .  .  We  should 
endeavor  to  follow  what  is  right,  and  not  what  is  established  " 

"  The  encroachments  of  the  rich  are  more  dangerous  to  the  State  than  those  of 
the  poor."  —  Aristotle 


BY 

HUGH   BOWLBY  WILLSON 


NEW  YORK 
P.    PUTNAM'S    SONS 

27   AND   29  WEST   23D   STREET 
1882 


Copyright  by 
G.  P.  PUTNAM'S  SONS. 


He 


* 


W&& 


PREFACE. 


£:  A  portion  of  the  postulates  on  which  this  work  is 
.   founded  appeared   in   the  winter  of   1875-6    in   "The 

-*  Anglo-American  Times,"  a  journal  published  in  London. 
My  object  was  to  direct  attention  to  the  desirability  of 
embodying  in  a  few  simple,  if  not  self-evident  proposi- 
tions, the  ascertained  and  generally  accepted  principles 

'  of  Monetary  Science.  Many  friends  and  others  for 
whose  judgment  I  have  much  respect,  to  whom  I  had 
sent  copies  of  the  journal  containing  my  articles,  having 

\  expressed  themselves  warmly  in  favor  of  this  plan  of 

^treating  the  money  question,  I  determined  to  extend  its 

k^  scope,  and  to  write  the  work  I  now  have  the  honor  to 

^T  submit  to  the  candid  criticism  of  those  who  make  eco- 
nomic science  a  study.  One  of  the  gentlemen  referred 
to,  Professor  Bonamy  Price  of  Oxford,  an  able  analytical 
writer  on  Banking  and  Currency,  in  his  usual  frank  and 
,  candid  manner,  wrote  me  promptly  on  receipt  of  the 
number  of  "The  American  Times  "  as  follows  :  — 

"So  many  thanks  for  your  letter  in  'The  American  Times.' 
It  is  exceedingly  good ;  and  I  rejoice  over  it  much,  especially  the 
postulates  and  principles.  The  21st  (35th  in  this  work)  is  capital. 
I  had  the  thought,  but  not  definitely  expressed.  The  meaning 
jumps  on  the  reader,  and  masters  him;  and  it  is  most  true." 


IV  PREFACE. 

When  I  commenced  my  investigations  on  this  subject 
many  years  ago,  it  was  my  intention  to  write  a  sort  of 
history  and  synopsis  of  the  theories  and  practices  of 
ancient  and  modern  nations  in  respect  to  their  curren- 
cies. This  I  soon  found  would  occupy  much  more  time 
than  I  could  then  devote  to  the  subject.  Again,  in  the 
winter  of  1875-6  I  took  up  the  same  idea;  and,  though 
I  felt  that  such  a  work  would  be  of  much  utility,  I 
found  on  an  examination  of  the  authorities  in  the  British 
Museum,  that  I  had  not  the  time  to  carry  out  the  plan. 
Hence,  I  turned  my  attention  to  reasoning  out  the  prin- 
ciples of  the  science  of  currency,  and  applying  them  to 
practical  purposes,  with  the  hope  of  influencing  thought 
towards  currency  reform,  in  those  countries  where  the 
question  is  undergoing  constant  discussion.  Such  are 
the  circumstances  that  have  led  to  the  writing  and  publi- 
cation of  this  work. 

Finding  in  the  present  systems  of  issuing  and  supply- 
ing paper  money,  so  much  that  is  at  variance  with  cor- 
rect scientific  principles,  I  have  devoted  much  space  to 
attacking  the  prejudices  and  ignorance  which  uphold 
them.  No  sound  system  can  be  established  in  any  coun- 
try without  rooting  out  the  "vested  rights  "  of  those  who 
make  a  profit  out  of  issuing  paper  money.  I  have, 
therefore,  vigorously  assailed  the  plan  of  delegating  the 
right  to  issue  paper  money  to  the  Bank  of  England  and 
National  Banks  of  the  United  States,  on  securities  or 
otherwise.  The  result  of  my  deductions  has  been  the 
evolvement  of  a  purely  automatic  method  of  supplying 
both  coined  and   paper  money,  —  supply  and  demand 


PREFACE.  V 

being  the  only  motive  power  to  be  used  in  keeping  the 
automaton  in  motion. 

The  attention  of  those  who  are  laboring  in  the  same 
field  is  directed  to  the  circumstance,  so  often  pointed 
out  by  Professor  Price,  that  the  "  mercantile  theory," 
which  teaches  that  the  first  consideration  of  economists 
and  legislators  is  to  pursue  measures  that  will  accumulate 
the  largest  possible  stores  of  the  precious  metals  in  a 
country,  is  still  a  fundamental  doctrine  in  some  minds, 
and  exerts  a  powerful  influence  in  the  action  of  the 
Bank  of  England  as  well  as  of  a  large  class  of  protec- 
tionists in  America.  The  plan  I  contend  for  leaves  these 
metals  free  to  the  distribution  of  the  natural  forces  of 
industry  and  trade. 

In  conclusion,  to  the  plan  I  have  adopted  in  the  treat- 
ment of  the  money  question  will  be  conceded  the  char- 
acteristic of  novelty,  and  is  put  forward  with  the  confident 
hope  that  it  will  lead  others  to  perfect  it.  It  is  desirable 
to  eliminate  erroneous  dogmas  and  fundamental  errors, 
in  order  that  a  really  correct  system  may  be  left  as  the 
result.     Much  has  been  done  since  the  days  of  Adam 

Smith,  but  much  still  remains  to  be  done. 

H.  B.   W. 
New  York,  May,  1879. 


SYNOPSIS   OF  THE   WORK. 


CHAPTER   I. 

PAGE 

PRINCIPLES  AND  POSTULATES  OF  MONETARY  SCIENCE  .  5 

CHAPTER     II. 
LABOR,   CAPITAL,    WEALTH,   SKILL,   AND   MACHINERY. 

PAR. 

1.  An  authoritative  treatise  on  Political   Economy  still   a 

necessity.         .........       16 

2.  The  civilization  of  a  country  is  in  the  ratio  of  its  knowl- 

edge of  correct  principles 18 

3.  Points  insisted  on  in  this  work  ......  18 

4.  Definitions  of  terms  used  in  this  chapter  ....  19 

5.  Capital  and  Wealth  in  their  largest  sense  identical,  and 

include  every  thing  having  market  value         ...       20 

6.  Mr.  Thomson  Hankey's  definition  of  Wealth   ...       20 

7.  His  errors,  and  want  of  clear  perceptions  .        .         .21 

8.  Every  thing  that  can  be  sold,  or  used  to  raise  capital,  to 

be  treated  as  capital 22 

9.  Some  modifications  in  use  of  terms 22 

10.  Great  confusion  of  ideas  among  writers  of  "  money  arti- 

cles "  on  the  subject  of  "  money  "  and  "  capital  "  .        -23 

11.  The  term  "Trading  Power"  introduced    ....      23 

CHAPTER    III. 

CAPITAL   AND   "TRADING   POWER"   FURTHER    CONSIDERED. 
—  ITS   TRANSFER   FROM   ONE   FORM   TO   ANOTHER. 

1.  Absurdity  of  treating  capital  and  money  as   the   same 

thing,  and  the  terms  as  synonymous       ....       24 

2.  Floating  capital,  on  analysis,  is  resolved  into  goods,  and 

the  accumulated  profits  of  industry        ....       25 


Viii  SYNOPSIS   OF  THE   WORK. 

PAR.  PAGB 

3.  Fixed  capital  is  whatever  possesses  the  quality  of  per- 

petuity      25 

4,  5.  Cash  capital  explained  and  defined        ....       26 

6.  Capital  invested  in  money  yields  no  profit         ...       26 

7.  Distinction  between  money,  the  tool  used  to  measure  val- 

ues, and  the  things  it  measures.     Paper  money  only  a 
more  convenient  tool       .......       27 

8.  A  plethora  of  trading  capital  indicates  a  condition  of 

over-trading.     The  safety  valve 28 

9.  Co-operation  suggested 28 

10.  Dangers  of  accumulations  of  vast  amounts  of  wealth       .       29 

11.  The  happy  medium,  where  labor  and  capital  work  in  har- 

mony        3° 

12.  How  money  measures  capital  and  values  ....       31 
13-15.  The  business  of  a  banker  to  develop  trading  power. 

The  marvellous  effect  of  modern  banking     .         .         -3i>32 
16.  The  mistake  in  clamoring  for  more  money  when  it  is 

more  trading  capital  that  is  needed         ....      32 


CHAPTER    IV. 

VALUE. 


1.  John  Stuart  Mill,  on  the  importance  of  the  subject . 

2.  Still  an  unsettled  question 

3.  Errors  of  Adam  Smith  and  other  economists  about  mar- 

ket value  ........ 

4.  Value  the  average  price  of  goods  in  an  open  market 

5.  Error  of  Mill's  theory 

6.  Mr.  Dunning  McLeod's  dicta  on  the  question    . 

7.  The  principles  which  govern  market  value  postulated 

8.  Supply  and  Demand  an  equation       .... 

9.  10.  It  takes  both  sides  the  equation  to  establish  and  regu 

late  value 

11.  Mr.  McCulloch's  formula  a  non  scqnitnr   . 

12,  13.  Other  illustrations  fallacious         .... 

14.  The  illustration  of  the  two  knights  and  the  shield  very 

apt 

15.  Some  absurdities  of  Professor  Caimes's  theories 

16.  Numerous  trashy  books  on  political  economy   . 


33 

33 

34 

34 
35 
35 
36 
36 

37 
33 
39 

40 
4i 
41 


SYNOPSIS   OF  THE   WORK. 


IX 


K 


CHAPTER   V. 

HOW  THE  VALUE   OF   MONEY  IS   SET   AND   REGULATED,  AND 

HOW   IT   DIFFERENTIATES    OTHER   VALUES. 
PAR.  page 

i.  The  value  of  money  in  the  ratio  of  its  volume,  or  set  and 

maintained  by  supply  and  demand  ....       42 

2.  Difference  between  convertible  and  inconvertible  paper 

money 42 

3.  Superior  fitness  of  gold  and  silver  for  measuring  values    .      43 

4.  How  the  value  of  the  metal  and  the  volume  of  money  in 

circulation  act  on  each  other 43 

5.  The  supply  of  money  the  nearest  approach  in  most  coun- 

tries to  free  trade 43 

6.  The  coinage  of  money  illustrates  the  advantages  of  free 

trade 44 

7.  How  the  value  of  money  and  of  bullion  are  made  to  coin- 

cide   44 

8.  Paper  money  issued  on  gold  or  fully  covered  by  gold  is 

regulated  by  the  same  principles  as  gold  money    .        .      44 

9.  Under  free  coinage  and   conversion,  no   more  gold   or 

paper  will  ever  be  issued  than  is  needed  for  use    .         .      45 

10.  The  absurdity  of  the  cry  for  "  more  money  "     .         .         -45 

11.  The  cry  for  more  inconvertible  and  depreciated  currency 

still  more  idiotic 4c 

12.  No  accurate  method  of  regulating  the  volume  of  incon- 

vertible paper  money 46 

13.  Remarks  of  Mr.  J.  B.  McCulloch  on  the  subject       .         .  46 

14.  Ignorance  of  legislators  on  the  subject      ....  46 

15.  Subject  better  understood  in  France  than  in  other  coun- 

tries          47 

16.  Science  demonstrates  the  superior  fitness  of  gold  and  sil- 

ver for  coinage 47 

17.  Taxation  for  revenue  the  justifiable  method  of  taxing  the 

products  of  labor 48 

18.  Distinction  between  the  terms  "  Standard  of  Value  "  and 

"  Measure  of  Value  " 48 


/^.. 


CHAPTER  VI. 

NOMISMA,"   OR   LEGAL   TENDER,   AND   BI-METALISM. 

The  ratio  between  gold  and  silver  regulated  by  supply 
and  demand 


49 


X  SYNOPSIS   OF   THE   WORK. 

PAR.  PACE 

2.  Bi-metalism  in  France  and  the  United  States    ...       50 

3,  4.  In  France  the  market  value  of  subsidiary  silver  coin 

maintained  by  limitation  of  volume        ....  51 

5.  The  "  craze  "  about  silver  coin  in  the  United  States         .  51 

6.  Bi-metalism  in  Great  Britain  and  Germany        ...  52 

7.  Inconvenience   and   effect   of  having   two   standards   of 

value 52 

8.  Aristotle  on  nomisma,  or  legal  tender        ....       52 

9.  Justinian's  admirable  exposition  of  money  53 

10.  He  points  out  the  desirability  of  using  a  metal  of  high 

market  value 54 

11.  M.  Cemuschi's  errors  about  money    .         .         .         .         .       54 

12.  13.  Sir  Isaac  Newton's  views  generally  correct  .         .       55 

14.  Gold  the  best  of  all  metals  for  a  measure  of  value  .        .      55 

15.  Evils  that  are  certain  to  follow  from  the  Act  of  Congress 

of  March,  1S78 56 

16.  Great  recent  fluctuations  in  value  of  silver        ...  57 

17.  No  object  and  no  economy  in  silver  money       ...  57 

18.  Overvaluing  of  the  silver  dollar  a  fraud    ....  57 

19.  20.  M.  Cemuschi's  views  on  a  bi-metallic  currency,  and 

money 58 

21.  If  the  proposal  to  have  two  standards  were  admissible, 

nothing  would  be  gained 59 

22.  Great  variations  in  the  market  value  of  silver  in  three 

centuries  and  notably  of  late 59 

23.  Modified  views  of  M.  Cemuschi 59 

24.  The  chief  object  of  the  bi-metalists  is  to  create  a  market 

for  silver,  which  is  contrary  to  monetary  science    .         .       60 

25.  The  true  plan  is  to  leave  the  people  to  choose  how  many 

of  each  kind  of  coins  they  require  ....      61 

CHAPTER   VII. 

THE  ORGANIZATION  OF  THE  BANK  OF  ENGLAND. — THE 
LAW,  THE  FACT,  AND  THE  SCIENCE  OF  THE  CASE. 

1.  Misconceptions  respecting  the  law  and  of   the  bank  in 

the  monetary  system 62 

2.  The  law  leaves  a  large  discretionary  power  never  exer- 

cised          62 

3.  The  provision  for  separating  the  Issue  from  the  Banking 

Department 62 


SYNOPSIS   OF  THE   WORK.  XI 

PAR.  PAGE 

4.  The  law  mandatory  only  as  to  first  issue  on  securities       .       63 

5.  Thereafter  amount  of  such  issue  might  be  lowered  and 

raised,  within  statutory  limits,  at  pleasure 

6.  Error  in  not  acting  on  such  discretion 

7.  First  statement  under  the  Act 

8.  The  Issue  Department  a  statutory  state-office,  but  the 

bank  is  liable  over  for  all  the  notes 

9.  The  practice  of  the  bank  not  the  result  of  the  law  . 

10.  Error  of  Mr.  Hankey  on  that  subject 

11.  Notes  held  in  reserve  must  be  held  to  be  the  same  as 

others ;  namely,  in  circulation         .... 

12.  Mr.  Leonard  Courtney,  M.P.,  on  this  subject     . 

13.  He  suggests  a  "  mechanical  separation  "  of  the  two  de 

partments  to  get  rid  of  confusion  of  ideas 

14.  Mr.   Ilankey's  claim   only  true   as   to   notes   issued   on 

metal 

15.  The  bank  ought  not  to  be  a  dealer  or  speculator  in  bul 

lion 

16.  He  correctly  states  what  is  good  cash  reserve  . 

17.  The  error  of  treating  all  notes  as  if  issued  on  metal 

18.  The  summing  up  of  logical  conclusions     . 

19.  Bank  doctrinaires  treat  with  scorn  what  they  cannot  an- 

swer          


63 
64 
65 

65 
66 

67 

67 
67 

68 

69 

70 
70 
7i 
7i 


72 


CHAPTER  VIII. 

PROFESSOR   BONAMY   PRICE   ON   THE   BANK   CHARTER. 

1.  The  error  of  the  Professor  about  the  power  of  the  bank 

directors  over  the  issue 73 

2.  Erroneous  view  of  the  directors  and  the  Professor  about 

the  calls  for  gold.  He  claims  that  the  gold  in  the  Issue 
Department  does  not  belong  to  the  bank,  though  the 
bank  draws  it  for  its  own  business  ....       73 

3.  The  Act  is  not  responsible  for  the  bad  system  of  the  bank, 

as  alleged  by  the  Professor 75 

4.  Professor  Price  inconsistent  with  himself  ....  75 

5.  The  bank  equally  inconsistent  with  itself  ....  76 

6.  The  Professor  declares  the  Bank  Act  a  failure  as  to  the 

purposes  of  its  "  promoters- " 77 

7.  The  Professor's  suggested  amendment       ....      77 


XU  SYNOPSIS   OF  THE   WORK. 

PAR.  PAGE 

8.  A  surgical  operation,  severing  the  connection  between  the 

bank  and  the  Government,  alone  capable  of  effecting  a 
change  in  the  present  system 78 

9.  The  Professor  called  on  to  "rise  and  explain"  .        .      78 

CHAPTER    IX. 

THEORY  AND  PRACTICE  OF  THE  BANK  OF  ENGLAND  FUR- 
THER CONSIDERED. 

1.  The  policy  of  the  bank   opposed  to   sound  theory  and 

practice 79 

2.  The   traditional   policy  of   the  bank  induces   a   chronic 

feverishness  in  financial  affairs 80 

3.  Its  whole  proprietary  capital  being  loaned  to  the  Govern- 

ment, the  bank  trades  wholly  on  borrowed  capital  .      81 

4.  Illustration  of  this  fact 82 

5.  If  the  notes  issued  on  securities  and  metal  were  made,  by 

law,  distinguishable  from  each  other,  this  fact  would 
become  conspicuous 82 

6.  A  million  of  coin  would  not  then  be  held  to  be  sufficient 

cash  margin  against  forty  or  fifty  millions  of  immediate 
liabilities 83 

7.  The  practice  of  the  bank,  in  respect  to  cash  reserve,  dif- 

ferent from  that  of  other  banks 84 

8.  The  alleged  prudent  management  considered    ...       84 

9.  Does  the  bank  make,  or  follow,  the  "  rate  "  ?    .         .         -85 

10.  Motives  imputed  to  the  bank  for  playing  with  the  rate     .       85 

11.  The  effect,  on  industry,  of  frequently  changing  the  rate   .       86 

12.  In  effect  the  same  as   a   changeable   tax   on   industrial 

productions 86 

13.  Imputations  of  mercenary  motives  considered  ...  87 

14.  Bank  losing  its  power  in  the  loan  market ....  87 

15.  Raising  the  rate  often  fails  to  stop  export  of  bullion        .  88 

16.  The  bank  policy  opposed  to  free  trade      ....  88 

CHAPTER    X. 

FALLACY  OF  THE  THEORY  OF  "ACTING  ON  THE  EX- 
CHANGES "  BY  THE  BANK  OF  ENGLAND.  —  VIEWS  OF  MR. 
ERNST   SEYD. 

1.  Mr.  Ernst  Seyd's  views  from  an  actuarial  point         .         .      89 

2.  He  shows  the  error  of  the  bank  in  treating  its  own  share 

of  the  note  issue  as  good  cash  reserve    ....      90 


SYNOPSIS  OF  THE   WORK. 

FAR. 

3.  Not  good  banking  to  invest  other  folks'  capital  in  long 

securities  liable  to  rapid  fluctuations 

4.  Bad  effects  of  the  practice  on  other  banks  and  banking 

5.  The  falling  in,  to  the  Bank  of  England,  of  the  whole  cir- 

culation of  the  kingdom,  will  intensify  the  evils  of  the 
present  system  of  management       .... 
t>.  A  change  in  respect  to  the  note  issue  needed,  if  the  bank 
absorbs  the  whole  circulation 

7.  Mr.  Seyd  rightly  treats  the  notes  held  by  the  banking  sid 

the  same  as  if  issued  to  the  public 

8.  He  points  out  the  evil  of  playing  with  the  rate 

9.  The  only  remedy,  an  independent   state   department  at 

Whitehall 

10.  Mr.    Seyd's    arguments    prove    demonstrably   that    Mr 

Hankey's  assertion  that  the  bank  has  no  control  over 
the  note  issue  is  erroneous 

11.  Mr.  Seyd's  fallacy  about  "a  more  perfect  working  system 

between  bullion  and  interest "         .... 

12.  Bullion  has  no  more  influence  on  interest  than  any  othe 

commodity 

13.  Side  issues  ought  to  be  avoided,  in  considering  the  note 

circulation 


9> 

91 


9? 
92 

93 
93 

94 

94 
95 
95 


CHAPTER  XI. 

MONEY   AND   BULLION.  —  WRONG  THEORIES    RESPECTING 
THEM. 

1.  The  precious  metals  only  one  of  many  factors  in  the  great 

sum  of  commercial  transactions 96 

2.  Money  and  bullion  confounded  with  each  other        .         .  97 

3.  The  distinction  obvious  and  important       ....  98 

4.  Wherein  they  differ  from  each  other  ....  98 

5.  Other  distinctive  features.    Action  of  supply  and  demand 

on  the  circulation  of  money 99 

6.  A  universal  monetary  system   necessary  to   an   equable 

action  of  the  natural  laws  on  circulation     ...      99 

7.  Great  confusion  of  ideas  growing  out  of  the  use  of  the 

terms  "  bullion  "  and  "  money  "  indiscriminately    .         .      99 

8.  Mr.  Stuart  Mill's  fallacies  respecting  the  action  of  supply 

and  demand  on  money 100 


XIV  SYNOPSIS  OF  THE   WORK. 

PAR.  PAGE 

9.  Goods   are  not  sold  for  money,  but   trading   power,  of 

which  money  forms  a  very  small  percentage  .         .        .     100 

10.  Goods  furnish  their  own  trading  power      ....     101 

11.  Modern  banking  affords  the  method  of  using  it         .        .     102 

12.  Bullion  is  not  used  to  settle  foreign  balances  of  trade,  so 

long  as  any  other  article  pays  a  better  profit .        .         .     102 

13.  The  importation  of  bullion  a  sign  of  poor  trade       .        .     103 

14.  Ignorance  on  this  subject  in  the  United  States.     Errors 

concerning  the  "  balance  of  trade  "  to  be  considered     .     104 


CHAPTER   XII. 

POPULAR  ERRORS  RESPECTING  THE  BALANCE  OF  TRADE. — 
THE  NEW  MERCANTILE  THEORY. 

1.  The   old  mercantile  theory.     It  taught  that  the   leading 

object  of  foreign  trade  should  be  to  attract  the  precious 
metals  to  a  country  . 105 

2.  The  policy  of  the  Bank  of  England  founded  on  this  false 

.  theory,  and  opposed  to  free  trade 105 

3.  What  Professor  Bonamy  Price  has  done  to  expose  this 

policy 107 

4.  The  theory  of  the  bank  stated.     Identical  with  the  old 

mercantile   theory  in   effect.      The   true  principles  of 
trade  postulated 107 

5.  No  difference  in  principle  between  domestic  and  foreign 

trade 10S 

6.  These  postulates  overthrow  the  Bank  of  England  dogmas. 

Former  delusions  of  the  bank  managers        .         .         .     10S 

7.  Palpable  absurdities  respecting  the  "favorable  balances 

of  trade " 109 

8.  Foreign  and  domestic  trade  must  be  treated  as  identical 

in  principle no 

9.  Delusions  respecting  debtor  and  creditor  nations      .         .111 

10.  The  vulgar  theories  of  trade  pushed  to  the  argiuncntiim 

ad  absardum    .         .         .         .         .         .         .         .         .111 

11.  Bullion  no  better  to  settle  balances  than  corn  or  cotton    .     112 

12.  A  great  practical  illustration  of  this  truth  .         .         .     112 

13.  All  trade  should  be  regarded  from  a  universal  stand-point .     113 


SYNOPSIS   OF  THE   WORK.  XV 


CHAPTER  XIII. 


MONEY,     CURRENCY,     LOANS,    AND    CHECKS.  —  TRUE    AND 
FALSE   PRINCIPLES. 

PAR.  PAGE 

1.  The  necessity  of  eliminating  erroneous  from  true  princi- 

ples in  economic  science 114 

2.  Great  confusion  of  ideas  respecting  currency  and  loans. 

J.  Stuart  Mill  on  the  subject 115 

3.  Necessary  to  differentiate  the  principles  and  processes 

involved  in  the  loan  business 116 

4.  Wherein  Adam  Smith  failed  of  a  clear  and  precise  view 

of  the  things  dealt  in,  in  the  loan  market       .         .        .116 

5.  He  did  not  perceive  how  goods  are  made  to  "  finance  " 

for  their  own  production  and  distribution       .        .         .     117 

6.  What  is  the  loan  market  ? 117 

7.  The  "  money  market "  not  the  loan  market        .        .        .118 

8.  The  demand  for  money,  or  currency,  not  regulated  by 

population,  but  by  industries 118 

9.  No  connection  between  currency  and  loans        .         .         .119 

10.  No  other  natural  rate  of  interest  than  that  set  by  supply 

and  demand 120 

11.  Bankers  and  all  others  should  buy  their  paper  money  of 

the  state,  the  same  as  they  do  metallic  .         .         .         .120 

12.  Both  kinds  of  money  perform  identical  services        .        .     121 

13.  "Vested  Interests"  impede  monetary  principles       .         .     121 

CHAPTER   XIV. 

MONEY,   CURRENCY,   AND   BANKING,  AND  THE  ECONOMY  OF 
PAPER   M<5NEY   CONSIDERED. 

1.  Fallacies   respecting   the   advantages   of   delegating  the 

issue  of  paper  money  to  banks 122 

2.  Errors  of  Professor  Bonamy  Price  on  the  subject     .         .     123 

3.  The  question,  Who  is  entitled  to  the  profits  of  paper 

money,  —  the  nation,  or  the  banks  ?         .        .         .         .124 

4.  The  Professor's  error  respecting  the  labor  and  capital  in- 

vested in  mining,  bullion,  and  money,  and  in  perishable 
goods ...     125 

5.  Greater  economy  of  a  state  over  other  issuers  .         .        .125 

6.  The  Professor  inconsistent  with  himself    ....     125 


XVI  SYNOPSIS   OF  THE   WORK. 

PAR.  PAGB 

7.  The  substitution  of  paper  for  metallic  money  one  of  con- 

venience, and  the  amount  must  be  left  to  the  regulation 

of  supply  and  demand 126 

8.  The  present  system  of  supplying  paper  money  by  the 

Bank  of  England  Issue  Department  one  of  great  ex- 
travagance of  metal 127 

9.  The  circulation  of  the  United  States         ....     127 

10.  Estimate  of  actual  net  gain  of  the  note  issue  in  Great 

Britain 127 

11.  The  theory  that  paper  money  should  be  primarily  con- 

sidered as  a  financial  expedient,  discarded     .        .        .128 

12.  Comparison  between  issue  of  paper  money  in  Great  Brit- 

ain and  the  United  States 129 

CHAPTER   XV. 

BANKS  OF  ISSUE,  DEPOSIT,' AND.  DISCOUNT. — THEIR  ORI- 
GIN.—  THE  ISSUE  OF  PaWr  MONEY  NOT  LEGITIMATE 
BANKING.  —  CANNOT  PROPERLY  BE  DELEGATED  TO 
BANKS. 

1.  The  great  importance  of  the  subject  discussed  in  this 

chapter.     What  is  legitimate  banking  ? .         .         .         .     130 

2.  Clearly  and  distinctly  stated  by  Professor  Price         .        .     130 

3.  The  chief  business  of  a  bank  is  to  utilize  the  market 

value  of  goods  in  course  of  production,  etc.  .         .         .     131 

4.  The  distinction  between  banks  of  deposit  and  discount, 

and  banks  of  issue 132 

5.  A  banker  the  borrower  and  lender  of  other  folks'  capital 

and  trading  power 133 

6.  When  he  lends  his  own  notes,  he  simply  trades  on  his 

own  credit.     His  notes  do  not  represent  goods      .        .     133 

7.  The  distinction  between  a  man's  trading  on  his  own  credit 

and  other  people's  goods 134 

8.  The  difference  between  ancient  and  modern  banking        .     135 

9.  The    Bank   of   England   the   first   bank   of  deposit   and 

issue  established  in  England  (1694).  The  name  of 
banker  unknown  in  England  in  the  time  of  Charles  the 
First 136 

10.  Started,  and  continued  ever  since,  on  false  principles        .     136 

11.  The  epochs  of  manias  for  paper  money     ....     136 

12.  The  original  banks  of  issue  neither  borrowed  nor  lent 

capital.     Notes  issued  only  on  metal      ....     137 


SYNOPSIS   OF  THE  WORK.  xvii 

PAR.  PAGE 

13.  The  note  issue  no  advantage  to  Bank  of  England     .        .     138 

14.  Profits  of  issue  not  a  primary  object  of  paper  money,  but 

to  create  a  more  convenient  tool 139 

15.  The  absorption  by  the  Bank  of  England  of  the  whole 

issue  of  the  kingdom  will  be  calamitous,  under  present 
policy  of  the  bank 139 

CHAPTER   XVI. 

BANKS   OF   DEPOSIT  AND  DISCOUNT,  OR  LEGITIMATE   BANK- 
ING, versus  banks  of  issue  and  clearing-houses. 

1.  How  a  bank  of  deposit  and  discount  should  be  organized. 

Must  have  an  adequate  cash  reserve      ....     140 

2.  The  banker  debits  himself  with  his  own  and  his  custom- 

ers' capital,  and  credits  himself  with  the  cash  he  holds, 
and  bills,  and  other  securities  held  for  loans  .         .         .     141 

3.  What  capital  a  banker  trades  on,  —  money  treated  only 

as  capital 141 

4.  The  check,  the  talisman  that  sets  the  whole  in  motion, 

and  makes  trading  capital  available,  where  money  plays 

its  part 142 

5.  A  bank  of  deposit,  pure  and  simple,  as  defined  by  Mr.  J. 

B.  McCulloch 143 

6.  Such  a  bank  an  immense  utilizer  of  money       .         ,         .  143 

7.  Other  descriptions  of  business  of  bankers         .         .        .  144 

8.  The  clearing-house  a  mighty  agent  for  settling  balances 

of  traders,  domestic  and  foreign 144 

9.  The  common  fund  on  which  a  banker  trades  made  up  of 

all  kinds  of  unused  capital  held  by  him,  awaiting  more 
permanent  investments 145 

10.  The  Bank  of  England  an  exception  to  the  rule.     A  clear- 

ing-house bank  suggested 145 

11.  The  issue  of  notes  adds  nothing  to  the  successful  conduct 

of  a  bank.     American  financiers    .  .        .         .     146 

12.  The  views  of  the  late  John  E.  Williams  on  the  issue  of 

notes  by  banks 146 

13.  Views  of  F.  A.  Spinner,  late  United  States  Treasurer, 

respecting  the  issue  of  paper  money      ....     147 

14.  Mr.  E.  G.  Spaulding's  contributions  to  the  stock  of  knowl- 

edge on  banking ,        .147 


SYNOPSIS   OF  THE   WORK. 


CHAPTER   XVII. 


"THE  PRIMARY  OBJECT  OF  PAPER  MONEY  IS  TO  SUPPLY 
A  BETTER  TOOL  OF  INDUSTRY  THAN  METALLIC  MONEY. 
—  INCIDENTALLY  ONLY  CAN  IT  BE  PROPERLY  TREATED 
AS   TRADING   POWER,   OR   RESOURCES  "   (POSTULATE  49). 

PAR.  PAGE 

i.  This  postulate  opposed  to  the  hitherto  accepted  doctrines 
respecting  the  issue  and  uses  of  paper  money.  This 
theory  wrong  .        .         .         .         .         .         .         .         .148 

2.  The  original  banks  of  issue  acted  on  the  principles  stated 

in  the  postulate,  in  part.     The  creation  of  a  better  tool 
ignored  entirely 149 

3.  Inconsistency  of   this  theory.      Issuing  notes  on   public 

securities  a  plan  for  organizing  a  bank  without  any  capi- 
tal     150 

4.  The  idea  of  issuing  paper  money  to  make  two   pounds 

out  of  one,  fascinating,  but  delusive       .         .         .         .     151 

5.  This  idea  at  the  bottom  of  all  the  fatal  calamities  result- 

ing from  the  issue  of  paper  money         .         .        .         .152 

6.  This  erroneous  idea  the  chief  motive  heretofore,  and  in 

America  and  the  Colonies  still,  for  establishing  banks 

of  issue 152 

7.  Banks  of  issue  always  "  over-issue,"  when  not  limited  by 

law.     The  Bank  of  England  no  exception      .         .  153 

8.  The  only  true  principle  laid  down  in  the  postulate  at  the 

head  of  this  chapter 153 

9.  10.  Traders  and  bankers  should  buy  their  paper  money  of 

the  state,  as  they  do  metallic  money,  at  its  full  market 
value 154 

11.  The  practice  of  taking  up  loans,  by  the  issue  of  paper 

money,  fundamentally  wrong 155 

12.  The  public  cry  for  the  issue  of  notes  by  banks,  a  mere 

device  to  favor  a  class 156 

13.  Chevalier's  theories  in  favor  of  a  state  issue     .         .         .     156 

14.  The  India  Issue  Department,  and  the  evils  of  a  silver 

standard 157 


/ 


SYNOPSIS   OF   THE   WORK.  XIX 

CHAPTER   XVIII. 

SUGGESTIONS  FOR  STATE  ISSUE  DEPARTMENTS  IN  GREAT 
BRITAIN  AND  THE  UNITED  STATES,  AND  CONSIDERA- 
TIONS   CONNECTED    THEREWITH. 

PAR.  PAGE 

i.  The  elements  for  constructing  such  departments  already 

exist,  and  only  need  consolidation 157 

2.  May  be  called  the  "  Money,"  or  "  Currency  Department,"     158 

3.  The  change  to  the  new  system  nearly  imperceptible  to 

the  public 158 

4.  Specification  of  chief  duties 159 

5.  The  question  of  using  a  part  of  the  cash  received  for 

notes  to  retire  a  portion  of  the  public  debt  considered  .     159 

6.  Question  of  compensation  to  issuing-banks  discussed       .     160 

7.  How  to  maintain  equilibrium  of  currency  during  change 

of  system 161 

8.  The  American  system  more  difficult  to  deal  with.     The 

Government  bound  to  uphold  the  banks,  and  furnish 

all  the  cash 161 

9.  Objections   to   selling  coin  reserve  to  any  considerable 

amount 162 

10.  If  such  sales  were  confined  to  a  part  or  the  whole  of  the 

increased  annual  demand  for  currency,  no  great  harm 
could  ensue 163 

11.  The  public  should  have  the  choice  of  small  notes  or  sil- 

ver, as  well  as  of  other  coins 163 

CHAPTER   XIX. 

SIR  ROBERT  PEEL'S  POSITION  ON  THE  NOTE  ISSUE.  —  MR. 
GLADSTONE  CLAIMS  THAT  IT  BELONGS  TO  THE  STATE. — 
WHEREIN   THE   ACT   OF    1S44   HAS   FAILED. 

1.  The  Act  of  1844  and  the  Acts  of  Congress  authorizing 

the  issue  of  treasury  notes  a  great  step  in  advance,  but 

fall  short  of  the  requirements  of  a  perfect  system         .     164 

2.  The  American  Acts  passed  solely  to  create  resources       .     165 

3.  Sir  Robert  Peel's  Act  fell  short  of   his  knowledge  and 

convictions.     His  remarks  on  the  subject      .         .         .     165 

4.  Causes  which  led  to  the  passage  of  the  Act.     Total  cir- 

culation of  the  kingdom  at  the  time       .         .        .         .166 

5.  The   Act   provides  for  the   ultimate   absorption   of  the 

entire  note  circulation  of  the' kingdom   .         .         .  167 


V 


u- 


XX  SYNOPSIS   OF   THE   WORK. 

PAR.  PAGE 

6.  Sir  Robert  Peel's  apology  for  perpetuating  the  issue  by 

the  bank  through  a  separate  department        .         .         .     168 

7.  His  motives  and  policy  quite  different  in  the  matter  of 

passing  the  Act  repealing  the  Corn  Laws       .         .         .     16S 

8.  Mr.  Gladstone's  opinions  on  the  note  issue        .        .         .     169 

9.  Monetary  science  no  longer  rests  on  mere  opinions    of 

men,  however  eminent 169 

10.  It  was  an  error  of  the  Act  of  1S44  to  leave  it  discretionary 

with  the  bank  to  issue,  to  itself,  the  whole  of  the  fiduci- 
ary notes  to  be  used  as  cash  reserve       .         .         .         .170 

11.  The  absorption,  or  concession,  of  all  the  country  banks' 

issue  will  cause  greater  evils  than  any  hitherto  arising 
from  the  issue  of  notes  on  public  securities  .         .        .     171 

CHAPTER    XX. 

BANKING  AND  CURRENCY  IN  THE  UNITED  STATES.  —  EVILS 
OF  A  SYSTEM  OF  UNLIMITED  ISSUE  OF  NOTES.  —  CEN- 
TENNIAL ADDRESS.  —  ONE  HUNDRED  YEARS  OF  BANKING 
IN   THE   UNITED   STATES. 

1.  Free  trade  in  bank  notes   and  "  protection  to   domestic 

industry  "  the  rule  in  America 171 

2.  Epochs  of   over-issues  concurrent  in  the  United   States 

with  similar  periods  in  Great  Britain      .         .  .     172 

3.  Before  the  civil  war,  the  chartering  of   banks  of  issue 

claimed  to  be  a  state  right  only 173 

4.  How  banks  were  organized,  and  conducted  their  business. 

Notes  of  banks  without  capital  circulated  for  want  of 
sound  currency 173 

5.  The  civil  war  annihilated  state  rights  in  respect  to  bank- 

ing and  slavery 174 

6.  Charles  Dickens's  account  of  American  currency  in  1842. 

A  people  without  money 174 

7.  The  period  of  "  Wild  Cat  and  Wolverine  Money."   From 

Jackson  to  Lincoln,  and  the  era  of  the  national  banks  .     175 

8.  Under  the  national  bank  system,  the  United  States  Gov- 

ernment acts  as  trustee  for  all  the  banks.     The  anom- 
aly of  the  system 177 

9.  A  bureau  established  for  the  purpose  of   aiding  in  the 

management  of  the  system 177 

10.  The  difference  between  treasury  and  bank  notes       .         .     177 

11.  Mr.  E.  G.  Spaulding's  centennial  address  .         .         .        .     178 


SYNOPSIS   OF   THE   WORK.  XXI 

PAR.  PAGB 

12.  He  claims  the  issue  of  legal-tender  notes  as  a  war  meas- 

ure only,  not  to  be  tolerated  in  peace     .         .        .         .  17S 

13.  This  currency  did  not  grow  out  of  industry       .        .         .  178 

14.  Confounds  currency  with  banking 179 

15.  National  bank  notes  do  not  "grow  out  of  industry"         .  180 

16.  The  absurd  cry  against  treasury  notes         ....  180 

17.  Close  issue  taken  with  Mr.  Spaulding        ....  1S1 

18.  Effects  of  inflation  on  industry.     Errors  corrected   .         .  183 

CHAPTER   XXI. 

THE  NATIONAL  BANKING  SYSTEM  OF  THE  UNITED  STATES. 
—  ITS  ORIGIN.  —  GOOD  AND  BAD  FEATURES,  AND  POSI- 
TION   IN   AMERICAN    POLITICS. 

1.  Position  of  parties  on  the  currency  question.     The  con- 

test likely  to  last  many  years 183 

2.  The  sole  motive  of   the   United   States  Government  in 

issuing  the  legal-tender,  or  greenback,  currency  was  to 
create  resources,  and  not  to  supply  a  better  currency. 
Change  of  parties  on  the  issue 184 

3.  Hon.  E.  G.  Spaulding  author  of  the  legal-tender  notes  Act. 

Limit  of  issue,  four  hundred  million  dollars,  with  fifty 
million  dollars  of  "fractional  currency."    Mi-.  Spaulding 
also  carried  the  National  Bank  Act  in  1S63.    P'ie  over- 
issue of  notes 185 

4.  The  new  currency,  especially  the  greenback,  very  popular. 

The  issue  of  notes  to  the  banks  a  huge  blunder     .         .     186 

5.  The  question  now  is,  whether  the  banks,  or  the  nation, 

shall  have  the  benefit  of  the  note  issue.  A  war  meas- 
ure may  be  good  in  times  of  peace         ....     187 

6.  The  issue,  by  government,  of  notes  to  banks  to  trade  on, 

for  profit,  unconstitutional,  and  contrary  to  public  policy.     187 

7.  Wherein  the  currency  measures  fell  short  of   a   perfect 

system,  and  the  effect  of  over-issue        ....     1S8 

8.  A  great  opportunity  lost  through  ignorance  of  monetary 

science  and  class  influences 189 

9.  The  good  purposes  conserved  by  the  issue  of  legal-tender 

currency.  The  issue  of  notes  on  securities,  without 
other  limit  than  the  public,  a  bonus  for  inflation    .         .     190 

10.  Effect  of  such  bonus 191 

11.  No  increase  of  paper  uncovered  by  gold,  in  Great  Britain, 

since  1S4S 192 


t- 


XX11  SYNOPSIS   OF   THE   WORK. 

CHAPTER   XXII. 

CURRENCY   AND   BANKING   IN    THE    UNITED    STATES    MADE 
SUBSERVIENT   TO   PARTY   ENDS    AND   INTERESTS. 

PAR.  PAGE 

i.  Party  Leaders,  as  Statesmen,  amenable  to  science 

and  sound  principles  for  their  conduct    ....     193 

2.  Remarkable  conversion  of  President  Grant  to  the  pro- 

bank  party  views  of  paper  money 193 

3.  The  party  election  "cry  "  of  1876  growing  out  of  the  cur- 

rency agitation 194 

4.  The  one  party  appeals  to  the  "  money  power,"  the  other 

to  the  "  laboring  millions."  A  dangerous  issue  to 
make        ..........     195 

5.  Very  desirable  to  have  the  money  question  definitely  set- 

tled on  a  sound  basis       .......     196 

6.  An  amendment  to  the  Constitution  strongly  urged  as  the 

only  final  remedy  in  the  United  States  ....     196 

7.  The  plan  of  lending  notes  to  banks  wrong,  and  must  be 

discontinued    .........     197 

8.  A  long  continued  resistance  to  the  abolition  of  the  prac- 

tice, and  continual  agitation  of  the  subject,  fosters  com- 
munism     198 

9.  The  issue  of  paper  money,  to  create  trading  power  and 

capital,  still  all  but  unanimously  adhered  to  in  American 
and  European  countries.  This  doctrine  the  main  cause 
of  crises 198 

10.  Free  trade  in  money  the  only  true  theory.     This  princi- 

ple applies  to  metallic  as  well  as  paper  money       .         .     199 

11.  What  is  free  trade  in  money       ......     200 

12.  The  Bank  of  France,  alone,  approximates  a  perfect  issue 

department 200 

CHAPTER   XXIII. 

CURRENCY  AND  BANKING  IN  FRANCE.  —  THE  BANK  OF 
FRANCE. 

1.  Great  delusions  have  occasionally  prevailed  in   France 

respecting  the  creation  of  wealth  by  the  issue  of  paper 
money.     "  Lawism  "  in  France 201 

2.  The  fundamental  error  of  issuing  paper  money  to  repre- 

sent the  value  of  goods,  public  or  other  securities,  and 
land 202 


^ 


SYNOPSIS   OF   THE   WORK.  XX1U 

PAR.  PAGE 

3.  After  the  assignats  and  commandats  came  hard  money, 

and  finally,  in  1800,  the  Bank  of  France         .         .         .     203 

4.  Its  prudent  management  and  large  profits         .         .         .     203 

5.  How  the  German  indemnity  was  paid  in  trading  power 

instead  of  metal 203 

6.  The  "  Stay  Law,"  or  law  to  extend  the  time  for  paying 

bills  held  by  the  bank  for  a  year.  Its  good  effect  sug- 
gestive to  other  countries 204 

7.  Reasons  for  the  sound  system  of  management   by  the 

Bank  of  France.  Always  keeps  an  ample  reserve  of 
metal 204 

8.  Much  of  its  success  as  a  bank  of  issue  due  to  the  cir- 

cumstance that  it  has  a  monopoly  in  the  supply  of 
notes,  showing  the  advantage  of  the  state  being  the 
only  issuer       .........     205 

9.  The  Treasury  Issue  Department  at  Washington  a  well- 

managed  office 205 

10.  The   only   important   question   in    France   seems   to   be 

whether  the  state,  or  the  bank  proprietors,  shall  have 

the  large  profits  of  the  issue 206 

11.  The  inconvenience  of  not  having  small  notes  in  France. 

Such  notes  would  greatly  diminish  the  amount  of  capi- 
tal invested  in  gold 206 

CHAPTER   XXIV. 

HOW  THE  VOLUME  OF  CURRENCY  AND  OTHER  THINGS 
AFFECT  THE  MARKET  OR  EXCHANGE  VALUE  OF  COM- 
MODITIES. —  PRESENT  INFLATED^  CONDITION  OF  THE 
CURRENCY  AND  BANK  DISCOUNTS  IN  THE  UNITED  STATES 
(MARCH,  1879),  AND  WHAT  IT  PORTENDS.  —  NICHOLAS 
BIDDLE   ON   CURRENCY. 

1.  The  postulates  relating  to  currency 207 

2.  Their  application  to  money  and  other  things     .        .         .  208 

3.  Money  cannot  be  claimed  to  be  exceptional       .         .         .  208 

4.  It  is  only  one  of  many  factors  in  the  sum  of  things  influ- 

encing values 209 

5.  How  to  determine  whether  money  has  fallen,  or  commodi- 

ties have  risen,  in  value 210 

6.  When   money  and   goods   have   increased   concurrently, 

their  exchange  or  market  values  will  not  be  altered        .     210 


XXIV  SYNOPSIS   OF   THE   WORK. 

PAR.  PAGB 

7.  The  ratios  of  production  have  been  wonderfully  main- 

tained for  the  last  thirty  years         211 

8.  But  for  the  increased  production  of  goods  since  the  mines 

of  the  United  States  and  Australia  were  discovered, 
gold  and  silver  must  have  risen 211 

9.  Money  and  the  trading  power  of  goods  together  deter- 

mine market  values 212 

10.  The  part  played  by  paper  money  and  bank  discounts        .  213 

11.  What  a  magazine  of  combustibles  exists  ....  214 

12.  The  currency  the  most  important  matter  before  Congress. 

Paper  money  only  proper  as  a  substitute  for  metal         .  215 

13.  Nicholas  Biddle  on  currency  and  banking.        .         .        .  216 

14.  Cash  reserve  of  national  banks  too  small ....  218 

15.  A  period  of  inflation  setting  in 218 

CHAPTER  XXV. 

GENERAL  SUMMARY  OF  THE  ARGUMENT.  —  THE  MONEY 
PROBLEM  TO  BE  SOLVED  BY  A  UNIVERSAL  MONETARY 
SYSTEM.  —  PLAN  FOR  SUCH  A  SYSTEM  SUGGESTED. — 
GREAT  BRITAIN  AND  AMERICA  TO  COMBINE  WITH  THE 
LATIN   NATIONS   AS   THE   INITIATION    OF   THE   SYSTEM. 

1.  The  question  must  be  taken  out  of  the  regions  of  empiri- 

cism and  dogmatic  assertion  ......     220 

2.  The  theory  of  paper  money  very  imperfect       .         .         .     220 

3.  The  idea  of  using  such  money  for  financial  ends  solely, 

must  be  got  rid  of.     Its  issue  must,  like  coin,  be  made 
automatic 221 

4.  What  progress  has  been  made 221 

5.  Fundamental  principles  always  kept  in  view     .         .         .     222 

6.  The  proposed  new  plan  may  be  introduced  without  de- 

ranging the  present  basis  of  industry     ....  222 

7.  Governments  must  not  become  bankers     ....  222 

8.  The  automatic  method  stated 223 

9-1 1.  Suggestions  for  a  scientific  and  universal  system  of 

metallic  and  paper  money 224,  225 

12.  General  statement  of  the  plan  itself 227 

13.  The  introduction  of  the  plan  presents  no  serious  difficul- 

ties   228 

14.  Table  showing  the  new  coinage  to  be  adopted  .        .         .     229 

15.  How  it  will  affect  present  coinage 229 


SYNOPSIS   OF  THE   WORK.  XXV 

PAR.  PAGE 

16.  Present  coins  very  closely  approximate  new  ones      .        .  230 

17.  Silver  dollars  will  not  circulate  so  long  as  one  and  two 

dollar  notes  are  issued 231 

18.  Silver  coins  to  be  treated  as  metallic  notes,  payable  in 

gold 231 

19.  What  shall  the  new  coins  be  called 231 

20.  Secretary  of  the  Treasury  Sherman's  views  on  an  inter- 

national monetary  system 232 


CHAPTER  XXVI. 


/     Jrftt. 


E  PROPOSED  UNIVERSAL  MONETARY  SYSTEM  FURTHER 
CONSIDERED.  —  SUBSIDIARY  COINS  TO  BE  CONVER- 
TIBLE. 

i.  National  issues  of  money,  metallic  and  paper,  the  only 
method  of  separating  money  from  finance  and  prevent- 
ing frequent  stoppages  of  specie  payments    .         .         .     233 

2.  Subsidiary  coinage  to  be  regulated  by  supply  and  demand, 

under  a  system  of  convertibility 234 

3.  Such  coin,  being  sold  for  its  face  in  gold,  like  paper  will 

never  be  in  too  little  or  too  great  supply        .         .         .     234 

4.  How  the  universal  monetary  system  will  regulate   for- 

eign exchanges  in  the  same  manner  as  domestic    .         .     235 

5.  The  motive  for  using  coin  as  merchandise  will  be  dimin- 

ished         235 

6.  Unreliability  of  statistics  as  the  basis  of   economic  sci- 

ence          236 

7.  The  distribution  of  money,  under  the  proposed  interna- 

tional system,  must  be  left  to  the  natural  laws       .         .     237 

8.  The  formulation  of  a  national  law,  or  treaty,  among  na- 

tions not  difficult 237 

9.  Practical  men  admit  the  abuses  and  great  evils  of  the 

present  system,  but  still  cling  to  it  .         .        .         .     238 

10.  The  deplorable  evils  resulting  from  relying  too  much  on 

statistics  as  a  basis  for  legislation  and  trade  .        .         .     238 

11.  All  theories  thus  founded  and  acted  on  crude  and  mis- 

leading, such  as  regulating  currency  per  capita      .        .     239 

12.  The  issue  of  small  notes  should  be  regulated  by  supply 

and  demand,  and  not  arbitrarily 240 


XXvi  SYNOPSIS   OF  THE   WORK. 

CHAPTER   XXVII. 

PAR.  PAGB 

SOME  MORE  ECONOMIC  FALLACIES. —  SEIGNIORAGE  A  TAX 
ON  MONEY.  —  GREAT  ADVANTAGES  OF  COIN  OVER 
PAPER   MONEY. 

i.  Errors  respecting  the  term  "  Common  Measure  of  Value,"    241 

2.  Object  gained  by  combining  the  scale  of  denominations 

with  the  measure  of  value,  in  the  coin   ....     242 

3.  Fallacy  respecting  money  being  the  only  "  medium  of 

exchange."     Distribution  more  correct  ....     243 

4.  Misconception  about  the  necessity  of  money  containing 

metal  value.     Metal  necessary  only  to  give  steadiness 

to  money  .......••     244 

5.  The  standard  and  the  measure  of  value  separable    .         .     244 

6.  Other  functions,  set  up  by  Professor  Jevons  and  others, 

for  money,  merely  fanciful 245 

7-12.  The  question  of  the  costliness  of  money  considered, 
and  the  fallacy  overthrown.  Paper  money  costs  the 
public  the  same  as  metal,  and  only  benefits  a  handful 

of  bankers      245-249 

'13.  The  question  of  seigniorage  considered     ....     249 

14.  Money,  of  all  the  tools  of  industry,  should  be  freed  from 

taxation,  and  state  and  bank  interferences,  and  be  left 

to  the  sole  action  of  the  natural  laws     ....     250 

15.  The  supply  and  demand  of  and  for  the  precious  metals 

has  little  effect  on  money 250 

CHAPTER   XXVIII. 

INDUSTRIAL   CRISES. —THEIR   CAUSES   AND   EFFECTS. 

I,  2.  Divisions  of  the  subject  and  term  defined.     The  Latin 

nations  comparatively  free  from  them    ....     251 

3.  Panics  not  the   cause,  only  symptoms   of  more   remote 

causes      ......••••     252 

4.  Caused  by  long-continued  violations  of  natural  laws  of 

industry,  of  which  panic  is  only  an  effect      .         .         .     253 

5.  The  issue  forth  from  bank.     It  is  the  office  of  economic 

science  to  find  the  causes 254 

6.  Due  to  the  systems  of  banking,  and  the  issue  by  banks  of 

paper  money 254 


/ 


SYNOPSIS  OF  THE   WORK.  xxvii 

PAR.  PAGE 

7.  How  banks  inflate  values  and  superinduce  speculation     .     255 

8.  American  system  of  banks  offers  a  bonus  to  invest  and 

speculate  in  bank  stocks  and  trade  in  paper  money       .     256 

9.  Banks  first  inflate,  then  violently  contract,  their  currency 

and  discounts 257 

10.  The  cycle  of  years  including  a  crisis  described  .         .     258 

11.  The  British  panic  of  1S66  due  to  long-continued  causes, 

and  not  the  result  of  "  unreasoning  panic"    .         .         .     258 

12.  The  disturbing  causes  of  industry  in  Great  Britain  are 

due  to  the  mischievous  policy  of  the  Bank  of  England,     259 


CHAPTER  XXIX. 

INDUSTRIAL    CRISES      CONTINUED.  —  THEIR    EFFECTS    AND 
REMEDIES. 

1.  Term  used  in  popular  senses,  of  a  continued  depression 

in  industrial  pursuits        .......     260 

2.  Diagnosis  of  the  malady  recommended     ....    .260 

3.  Mr.  E.  G.  Spaulding's  description  of  the  crises  of  1837- 

43.     First  contraction,  then  expansion,  of  currency  and 

discounts 261 

4.  How  bills,  discounted,  are  multiplied        ....  261 

5.  Suspension  of  all  the  banks  in  the  United  States      .        .  262 

6.  Crisis  of  1S57  from  same  causes 262 

7.  Crisis  of  1S73-7S  the  most  depressing  the  United  States 

ever  passed  through 262 

8.  Experiences  in  Great  Britain.     Panic  and  crisis  of  1825- 

29.     Great  increase  of  banks  of  issue,  and  unbounded 
speculation 263 

9.  Afford  evidences  of  the  truism  "  like  cause  produce  like 

effects  " 265 

10.  The  extent  of  the  evil  grows  out  of  the  general  practice 

of  nearly  all  classes  trading  on  margins  of  ten,  twenty, 

or  thirty  per  cent     ........     265 

11.  Great  falls  in  the  market  value  of  goods  destroy  margins,     266 

12.  The  remedy  to  be  sought  in  abolishing  banks  of  issue, 

and  establishing  scientific  issue  departments  for  coin 

and  paper 266 

13.  14.  French  finance  and  currency  the  best  examples  of 

such  issues 267 


XXVUl  SYNOPSIS   OF  THE  WORK. 

CHAPTER  XXX. 

INDUSTRIAL  CRISES  CONTINUED.  —  HOW  "PROTECTION  TO 
DOMESTIC  INDUSTRY  "  COUNTERACTS  THE  NATURAL 
ORDER  OF  THINGS,  —  FIRST  CAUSING  EXTREMELY  HIGH 
PRICES  AND  OVER-SUPPLY  ;  THEN,  BY  RE-ACTION,  EX- 
TREMELY LOW  PRICES  :  THUS  SUPERINDUCING  AND 
INTENSIFYING   CRISES. 

PAR.  PAGE 

268 

269 


269 
270 

271 
271 


273 

274 

275 
275 


1.  What  protection  aims  at  and  effects  .... 

2.  Who  are  benefited  and  who  injured  by  it  . 

3.  It  draws  capital  and  labor  from  industries  not  affected 

by  its  operation  into  others  to  be  built  up 

4.  Protection  a  mere  excuse  for  one  class  to  rob  another 

5.  A  revenue  tariff  inures  to  the  advantage  of  the  nation 

protection  to  a  small  class  only       .... 

6.  An  example  given  in  proof 

7.  Protection  drew  both  capital  and  labor  away  from  farm- 

ing, prior  to  the  crisis  of  1873 273 

8.  This  gave  an  immense  stimulus  to  protected  industries, 

which  led  to  over-supplies  of  them,  and  to  undue  specu- 
lation, and,  finally,  to  crisis 

9.  Thus  the  natural  order  of  things  was  destroyed 

10.  Great  Britain  less  affected  by  crises  .... 

11.  Over-consumption,  or  excessive  demand,  considered 

12.  A   better   knowledge    of    economic   principles    the    best 

remedy    ..........     276 

13.  Protection  causes  violent  oscillations  in  the  general  indus- 

tries, and  in  supply  and  demand 276 

14.  France  and  the  United  States  have  prospered  in  spite  of, 

and  not  because  of,  protection 277 


CHAPTER  XXXI. 

INDUSTRIAL  CRISES. — THEIR  CAUSES   AND   REMEDIES   FUR- 
THER  CONSIDERED. — THE   CONCLUSION. 

1.  Industrial  influences  and  considerations  not  yet  consid- 

ered   277 

2.  The  part  played  in  industrial  phenomena  by  the  wealth 

and  capital  saved 278 


SYNOPSIS  OF  THE   WORK.  XXIX 

PAR.  PAGE 

3,  4.  The  effect  of  the  accumulation  of  uninvested  capital 
on  the  rate  of  interest,  and  how  it  has  enabled  England 
and  the  United  States  to  fund  their  debts  at  lower  rates 
of  interest       .........     279 

5.  Where  will  the  limit  of  productive  enterprises  end  ?    Not 

reached  yet  by  present  processes 280 

6.  The   tendency   to   accumulate   wealth   in    a  few   hands. 

Ought  it  to  be  prevented  by  taxation?    ....     280 

7.  Aristotle's  views   about   public   tables   supplied   by  the 

state 281 

8.  The  question  involves  the  whole  fundamental  principles 

of  taxation  and  the  function  of  government  .         .        .     281 

9.  The    faults    of   the    American    system    of  government. 

Every  office  in  effect  put  up  for  sale ....     282 

10.  Was  well  enough  at  the  start,  but  unequal  to  equitable 

government  now 282 

11.  Bearing  of  this  subject  on  industry 283 

12.  The  duty  of  government  to  protect  the  weak  against  the 

strong,  the  poor  against  the  rich 283 

13.  Methods  for  directing  the  investment  of  surplus  capital 

in  more  permanent  undertakings 284 

NOTES. 

1.  The   market  value   of    inconvertible   legal-tender  paper 

money  in  the  inverse  ratio  of  its  volume.  May  be  held 
at,  or  raised  above,  the  par  of  gold  coin  by  limiting  its 
amount.  This  proposition  disregarded  by  statesmen 
and  legislatures 285 

2.  The  difference  between  money  and  other  kinds  of  trading 

power  very  distinguishable 286 

3.  Supply  and   demand   being   the   only,  theoretically   and 

practically,  true  regulator  of  interest,  all  artificial  restric- 
tions and  methods  are  fundamentally  wrong,  and  inju- 
rious to  industry.  No  pretext  for  claiming  that  the 
trade  in  bullion  is  different  in  its  effects  from  the  trade 
in  other  commodities       .......     287 

4.  The  balance  of  trade  explained  by  an  old  and  experienced 

merchant 288 


XXX  SYNOPSIS   OF  THE   WORK. 

APPENDIX   I. 

PAR.  PACK 

1.  Views  of  M.  M.  Chevalier  on  the  state  prerogative   to 

issue  notes,  in  a  letter  to  the  author   ....     291 

2.  A  second  letter  from  M.  M.  Chevalier  on  the  same  subject,     293 

3.  The    State   Issue   Department   for   India.     Letter  from 

Lord  George  Hamilton,  Under  Secretary  for  India,  by 
direction  of  the  Marquis  of  Salisbury,  Chief  Secretary. 
Success  of  the  India  note  issue 294 

4.  Denominations   of   notes   issued   and   amount   of  paper 

circulation 295 

1  -'  5.  Views  of  Gen.  Spinner,  late  United  States  Treasurer,  on 
the  currency  question  in  America.  His  plan  for  regu- 
lating the  volume  of  paper  money 296 

6.  Second  letter  from  Gen.  Spinner.     Bigotry  of  the  press 

against  the  national  issue  of  paper  money     .         .         .     297 
7,  8.  Remarks   on   Gen.  Spinner's   plan   for   regulating   the 
natural  laws  of  trade,  and  an  extract  from  a  pamphlet 
issued  by  the  author  in  London,  in  1874,  pointing  out 
the  fallacy  of  the  "  interconvertible  "  plan      .         .        .     298 


APPENDIX    II. 

VIEWS    OF    EMINENT     AMERICAN    STATESMEN    AND    ECONO- 
MISTS  ON   THE   ISSUE   OF   PAPER   CURRENCY. 

i.  Mr.  Jefferson 299 

2.  Mr.  Calhoun 300 

3.  Daniel  Webster 305 

4.  Mr.  Madison 308 


-' 


MEMOIR  OF  THE  AUTHOR. 


The  author  of  the  accompanying  work  was  by  birth 
a  Canadian,  the  son  of  a  distinguished  parliamentarian. 

His  father,  the  late  Hon.  John  Willson  of  Saltfleet, 
Ont.,  was  born  of  English  parentage,  in  the  State  of  New 
Jersey,  in  August,  1776.  There  were  two  brothers,  Hugh 
and  John,  who  after  the  death  of  their  father,  and  accom- 
panied by  their  guardian,  in  the  year  1 790  removed  to 
Canada,  and  took  up  their  abode  at  Niagara,  where  they 
remained  until  the  majority  of  John,  the  younger,  in 
1797. 

They  then  chose  the  beautiful  shore  of  Lake  Ontario 
for  a  home,  settling  the  district  of  Saltfleet,  where  they 
resided  with  their  families  and  the  friends  they  had 
gathered  about  them,  until  their  deaths,  the  elder  in 
1858,  the  latter  in  i860. 

They  were  men  of  master  minds,  rarely  fitted  by  na- 
ture for  the  life-work  before  them ;  vigorous  intellects, 
an  intense  thirst  for  knowledge,  and  indefatigable  perse- 
verance, coupled  with  keen  sense  of  justice,  and  innate 
refinement  of  character.  They  could  not  do  otherwise 
than  take  prominent  parts  in  the  country  they  settled, 
becoming  the  champions  of  both  civil  and  religious  lib- 


XXXU  MEMOIR   OF  THE   AUTHOR. 

erty ;  and  while  the  elder  brother  toiled  for  the  good  of 
the  church,  which  was  so  clear  to  his  heart,  the  ambi- 
tion of  the  younger,  naturally  expanding  with  the  growth 
and  development  of  the  country  of  his  adoption,  drifted 
into,  and  fought  stanchly  through  a  lifetime  for,  political 
principles. 

As  early  as  1S08,  so  prominently  had  his  superior 
abilities  asserted  themselves,  he  was  called  to  represent, 
not  his  own  borough  in  Parliament,  but  one  at  some 
distance  from  his  home,  —  the  West  Riding  of  York  (or, 
as  it  was  afterwards  known,  Halton),  and,  being  duly 
elected,  took  his  seat  accordingly,  for  the  fifth  Parliament 
of  Upper  Canada.  He  afterwards  represented  his  own 
district  for  a  great  number  of  years,  both  in  the  House 
of  Assembly  and  also  the  Legislative  Council,  being 
speaker  for  a  long  time,  and  exercising  an  influence 
second  to  none  in  the  province. 

To  him  is  Canada  indebted  for  its  common-school  Act. 
He  was  its  originator,  and  kept  it  steadily  before  him  for 
a  series  of  years,  until,  with  untiring  perseverance,  he 
succeeded  in  accomplishing  the  cherished  work  of  his 
life,  by  casting  the  vote  through  which  it  became  a  law. 
He  was  at  the  time  speaker :  there  was  a  tie-vote.  He 
promptly  placed  a  brother  member  in  his  chair,  and 
descending  to  the  floor,  so  closely  was  the  battle  fought, 
gave  the  vote  which  made  it  a  success.  He  warmly 
supported  all  public  improvements  with  the  entire  spirit 
and  energy  of  his  noble  nature,  thereby  greatly  assisting 
in  the  development  of  the  resources  of  his  country.  He 
was  a  man  so  sound  in  principles,  so  pure  in  action,  so 


MEMOIR   OF  THE  AUTHOR.  XXX1U 

true  in  allegiance,  and  so  upright  in  character,  that 
though  he  lived  through  a  rebellion,  and  parted  with  the 
friends  of  his  early  political  life  in  the  contest,  —  at  one 
time  fighting  almost  single  handed,  in  the  Legislative 
Council,  the  crafty  Lord  Sydenham  in  the  Act  for  the 
Union  of  the  Provinces,  which,  as  a  member  of  the 
Assembly,  he  had  defeated  seventeen  years  previously, 
and  which  he  had  always  opposed  on  the  grounds  of 
difference  in  laws,  religion,  language,  and  institutions,  — 
the  faintest  taint  of  political  corruption  never  reached 
his  name.  He  carried  to  his  grave  the  boast  that  he 
was  the  recipient  of  no  favor  from  his  government  that 
he  had  not  earned  at  the  hands  of  his  fellow-countrymen 
at  the  hustings,  and  which  had  not  been  accorded  to  him 
by  acclamation. 

Rising  as  he  did  by  his  personal  ambition  and  exer- 
tions to  the  zenith  of  power  and  place,  his  name  can 
never  be  disassociated  from  his  country,  but  must  always 
shine  out  in  its  history  through  forty  years  of  parliamen- 
tary life  as  that  of  one  of  the  most  remarkable  men,  as 
well  as  one  of  the  most  distinguished  statesman  of  his  age. 

Of  such  a  father  was  born,  in  the  early  autumn  of 
1813,  the  writer  of  this  work,  at  the  old  homestead  built 
in  1797  on  the  pleasant  shores  of  Lake  Ontario.  He  was 
the  second  son,  and  perhaps  of  all  the  numerous  family 
the  one  who  most  nearly  resembled  his  father  in  intel- 
lectual ability.  At  all  events,  the  path  in  life  selected 
secured  to  him  more  time  for  scholarly  attainment,  and 
a  larger  development  of  his  natural  tastes  and  powers, 
than  any  of  his  brothers. 


XXxiv  MEMOIR  OF  THE   AUTHOR. 

After  receiving  the  best  education  which  his  country 
afforded,  he  chose  the  law  as  a  profession.  Instead  of 
seeking  preferment  through  the  power  and  influence  of 
his  father,  then  in  the  zenith  of  his  fame,  he  went  man- 
fully to  work,  to  hew  out  unaided,  as  his  father  had  done 
before  him,  a  name  and  a  place  for  himself.  He  pos- 
sessed an  element  of  character  which  he  did  not  inherit 
from  his  father,  —  the  disposition  to  compare  mankind, 
not  only  through  the  medium  of  books,  nor  within  the 
circumscribed  limits  afforded  his  father  in  a  life-long  resi- 
dence in  one  country,  but  an  ambition,  through  travel, 
to  widen  the  scope  of  vision,  whilst  enlarging  and 
strengthening  his  powers  of  mind.  He  was  a  close  ob- 
server, a  deep  thinker,  and  a  logical  reasoner.  He  used 
all  his  God-endowed  gifts  for  the  benefit  of  his  fellow 
creatures. 

He  commenced  the  study  of  law  at  the  Law  Society  of 
Upper  Canada,  Osgoode  Hall,  in  1836;  was  called  to 
the  bar  at  the  Easter  term  in  1842,  and  began  the  prac- 
tice of  law  as  a  barrister.  But  his  health  becoming 
enfeebled  through  a  severe  attack  of  inflammatory  rheu- 
matism, the  result  of  exposure  in  a  terrible  storm,  forced 
him  almost  in  the  outset  of  his  professional  life  to  relin- 
quish his  work,  and  seek  for  a  time  relief  in  a  milder 
clime.  He  went  to  the  West  Indies,  and  for  nearly  two 
years  lived  the  greater  part  of  the  time  in  his  yacht  upon 
the  southern  ocean,  visiting  all  the  islands,  and  amusing 
himself  by  writing  descriptions  of  all  that  he  saw.  Those 
letters  were  given  to  the  public  through  the  medium  of 
"The  New  York  Albion," — attracting  considerable  at- 


MEMOIR    OF    THE    AUTHOR.  XXXV 

tention, — and  to  that  journal  he  was  for  many  years 
afterwards  a  constant  contributor. 

Upon  his  return  to  his  native  land,  he  resumed  his 
profession,  taking  soon  a  prominent  position  in  the  town 
of  Hamilton,  which  place  he  had  chosen  for  his  residence. 
He  became  closely  identified  with  it,  and  worked  zeal- 
ously for  it,  even  to  the  close  of  his  life.  He  purchased 
a  large  tract  of  land  contiguous  to  the  city,  which  was 
afterwards  incorporated  within  its  limits,  which  he  laid 
out  with  great  taste,  and  embellished  with  avenues  of  fine 
trees,  blocks  of  fine  dwellings,  etc.  He  was  the  main- 
spring of  all  improvement,  a  public  benefactor,  giving  his 
time,  his  means,  and  his  labor  without  stint  to  the  work. 

He  was  one  of  the  originators  of  the  Great  Western 
Railway  of  Canada,  and  did  more  than  any  other  man  to 
make  it  a  success,  working  persistently  for  municipal  aid, 
which  formed  the  nucleus  of  the  fund  with  which  it  was 
subsequently  constructed.  Through  his  instrumentality 
was  built  the  first  large  hotel  h-la  American.  Water- 
works for  the  city  were  projected  and  public  libraries. 
The  second  daily  newspaper  in  Canada  owed  its  life  to  his 
energy.  He  held  unmistakably  "the  pen  of  a  ready 
writer,"  and  it  was  ever  prompt  in  the  cause  of  humanity. 
He  organized  in  1846  the  first  conservative  journal  west 
of  Toronto,  in  the  semi-weekly  "  Spectator  "  of  Hamilton, 
edited  by  the  late  Robert  R.  Smiley  of  that  city,  giving 
him  at  all  times  his  influence  and  aid,  and,  when  the 
editor  was  in  failing  health,  taking  entire  charge  of  it  for 
some  months  before  his  death. 

He  was  chosen  by  his  fellow-townsmen,  in  conjunction 


XXXVI  MEMOIR   OF  THE   AUTHOR. 

with  Mr.  Tiffany,  a  prominent  lawyer  of  that  place  with 
whom  he  was  associated,  to  proceed  to  Washington  in 
the  winter  of  1847  and  1848,  to  place  before  Congress 
the  Reciprocity  Treaty.  During  that  winter,  through  the 
courtesy  of  the  English  Minister,  he  was  presented  to 
the  lady  who  afterwards  became  his  wife.  He  was  suc- 
cessful with  his  treaty,  which  many  years  afterwards,  at 
the  period  of  his  death,  he  was  earnestly  seeking  to  re- 
new, with  increased  advantages  to  his  countrymen,  as 
the  letter  which  appeared  in  "  The  New  York  Herald," 
a  few  days  previous  to  his  death,  will  testify ;  for,  whilst 
he  lay  ill,  his  home  was  besieged  by  reporters  of  the  va- 
rious New  York  journals,  seeking  information  from  the 
dying  man,  who  was  no  longer  able  to  give  them  items, 
the  matter  having  been  placed  by  him  in  the  hands  of  the 
honorable  members  of  Congress,  Fernando  Wood  and 
S.  S.  Cox  of  this  city,  for  legislation  in  that  body. 

He  placed  in  the  English  and  other  European  markets 
the  bonds  and  debentures  of  many  of  the  largest  under- 
takings, not  only  of  Canada,  but  of  the  north-western 
States'  railroads  ;  and  his  work  unconsciously,  as  it  were, 
connecting  itself  with  great  enterprises,  for  which  his 
powers  seemed  peculiarly  adapted,  it  came  to  pass  unin- 
tentionally that  his  professional  life  passed  unobservedly 
from  him,  being  superseded  by  that  which  the  exigency 
of  the  times  and  the  development  of  his  country  required 
from  the  fine  perception  and  indefatigable  perseverance 
of  a  leader  in  the  cause  of  science,  advancement,  and 
political  economy. 

He  went  frequently  abroad,  in  fact,  and  resided  there 


MEMOIR    OF    THE    AUTHOR.  XXXVU 

often  for  lengthened  periods,  doing  the  work  that  less 
advanced  minds  would  have  found  it  impossible  to  ac- 
complish, but  always  with  a  modesty  and  single-hearted- 
ness most  remarkable. 

He  was  appointed  by  the  Canadian  Government  one 
of  their  Commissioners  to  the  Universal  Exposition  of 
Paris  in  1855.  During  one  of  his  prolonged  sojourns  in 
London  he  published  a  work  on  the  "  Science  of  Ship- 
building," which  was  most  favorably  mentioned  by  the 
English  Press,  and  brought  him  prominently  into  the 
notice  of  the  Royal  Society  of  Naval  Architecture,  from 
which  body  he  received  an  invitation  to  deliver  before 
them  a  series  of  lectures,  which  pleasant  duty  he  ac- 
cepted, as  it  was  greatly  in  accordance  with  his  taste,  it 
having  been  with  him  for  many  years  a  favorite  study. 
The  ships  of  the  well-known  "  White  Star  Line "  are 
built  largely  after  his  models  and  designs,  as  given  in 
those  lectures  to  the  English  public. 

His  pen  was  never  idle  :  he  watched  with  great  interest 
the  changes  taking  place  from  time  to  time  in  his  own 
country,  and  wrote  extensively  for  "  The  Quebec  Chroni- 
cle "  and  other  journals  on  the  trade  of  the  country, 
among  other  things  a  series  of  letters  on  the  "  Military 
Defences  of  Canada,"  which  was  afterwards  published  in 
pamphlet  form.  Soon  after  the  close  of  the  American 
Rebellion,  he  made,  at  the  request  of  the  governor  of 
North  Carolina,  a  most  interesting  and  exhaustive  report 
on  the  wild  lands  of  that  State,  with  a  view  to  their 
development,  through  Swiss  colonization,  to  take  the 
place  of  the  old-time  slave  labor.     For  many  years  he 


XXXV111  MEMOIR   OF  THE   AUTHOR. 

had  been  a  member  of  the  American  Institute,  and  de- 
livered from  time  to  time  before  them  lectures  upon  the 
issues  of  the  day  most  prominent  and  interesting  to  the 
public.  The  lectures  and  plans  of  one  season's  labor 
were  embodied  in  a  work  entitled  "  High  Speed  River 
Steamers."  Another  in  March,  1870,  "A  Plea  for  Uncle 
Sam's  Money,"  or  "  Greenbacks  versus  Bank  Notes ;  "  in 
October,  1874,  "  Money  versus  Capital  and  Loans  ;  "  and 
again,  at  the  request  of  the  Congressional  Committee  on 
the  depression  in  labor  and  business  in  1879,  a  work 
entitled  "  Industrial  Crises,  their  Causes  and  Remedies," 
printed  at  governmental  cost. 

He  was  a  thoroughly  well-read  man,  an  accomplished 
scholar,  and  a  genial  gentleman.  He  was  in  constant 
correspondence  with  the  prominent  men  of  the  age,  not 
only  in  America,  but  Europe,  and  through  this  interesting 
medium  kept  himself  thoroughly  informed  upon  all  the 
great  events  of  the  times.  He  was  a  man  of  feeble 
health,  having  suffered  the  greater  part  of  his  life  from 
an  organic  disease  of  the  heart ;  and  it  was  only  by  the 
greatest  prudence,  and  carefully  hoarded  and  judiciously 
used  powers  of  mind  and  body,  that  he  was  enabled  to 
accomplish  so  much.  The  last  year  of  his  life  was  given 
almost  exclusively  to  the  writing  of  the  accompanying 
work.  In  home  life  he  was  most  lovable,  a  kind,  indul- 
gent, affectionate  Christian,  having  been  a  member  of  the 
church  of  England  since  his  early  manhood. 

He  passed  from  us  after  an  illness  of  five  days  of 
pleuro-pneumonia,  on  the  29th  of  April,  1880,  and  in 
accordance  with  a  request,  oft  repeated,  to  be  interred 


MEMOIR   OF   THE  AUTHOR.  XXXIX 

near  his  father,  was  laid  reverently  to  rest  by  his  brother 
Masons,  beside  his  honored  parent  in  the  country  church- 
yard at  Grimsby,  Ont.,  near  the  place  of  his  birth. 

.  .  .  "  Sustained  and  soothed 
By  an  unfaltering  trust,  approached  the  grave 
Like  one  who  draws  the  drapery  of  his  couch 
About  him,  and  lies  down  to  pleasant  dreams." 

HUGH   R.   WILLSON. 


INTRODUCTION. 


EVILS  RESULTING  FROM  THE   INDEFINITENESS   OF   TERMS  USED 
BY   MOST  WRITERS  ON   POLITICAL   ECONOMY. 

I  have  endeavored  in  this  work  to  so  qualify  and  limit 
the  meaning  of  terms,  as  to  prevent  the  possibility  of  mis- 
conception. The  habit  of  using  the  same  term  "  indis- 
criminately," as  Mr.  Mill  deliberately  does,  or  in  several 
different  senses,  as  Mr.  Bageat  has  done,  through  confus- 
ion of  thought,  in  reference  to  money,  greatly  detracts 
from  the  writings  of  a  majority  of  received  authorities. 
Archbishop  Whately  observes  on  this  subject,  "The  great 
defect  of  Adam"  Smith,  and  our  economists  in  general,  is 
the  want  of  definiteness.  .  .  .  The  terms  of  this  science 
being  drawn  from  common  discourse,  and  seldom  care- 
fully defined  by  the  writen  who  employ  them,  hardly  one 
of  them  has  any  settled  and  determined  meaning ;  and 
their  ambiguities  are  perpetually  overlooked." 

Mr.  Henry  Dunning  McLeod,  whose  use  of  expres- 
sions and  bad  logic  I  have  had  occasion  to  criticise, 
after  quoting  the  above  paragraph,  severely,  but  not  too 
much  so,  remarks,  — 

"  Cobbett  wrote  an  English  grammar,  in  which  all  the 
solecisms  and  blunders  were  drawn  from  the  speeches  of 
peers,  and  members  of  Parliament :  so  we  might  under- 
take to  write  a  complete  treatise  on  logic,  and  every 
example  of  logical  fallacy  should  be  drawn  from  the 
published   opinions,    either   spoken   or   written,    of   Mr. 


2  CURRENCY. 

Ricardo,  Mr.  McCulloch,  Mr.  John  Stuart  Mill,  Mr.  Sam- 
uel Jones  Loyd  (Lord  Overstone),  Col.  Torrens,  Sir 
Robert  Peel,  and  Sir  Archibald  Allison,  on  the  subject  of 
currency." 

It  would  be  difficult  to  find  so  stupendous  a  blunder 
or  so  complete  a  misapplication  of  a  term  as  to  treat  bills 
of  exchange,  or  any  interest-bearing  security,  or  bankers' 
checks,  as  currency.  Trading  or  purchasing  power  they 
are  ;  but  in  no  sense  of  the  words,  and  by  no  perversion 
of  principles,  are  such  securities  money,  or  currency,  —  the 
latter  embracing  the  former.  Nevertheless,  Mr.  McLeod 
and  a  host  of  others  have  broadly  claimed  for  them  the 
function  of  currency.  Bills  of  exchange  are  simple  obli- 
gations set  down  in  writing  to  specify  something  to  be 
paid  or  received  ;  and,  when  "discounted,"  the  proceeds 
are  capital,  trading  or  purchasing  power.  "Trading 
Power  "  is  the  term  I  have  adopted ;  as  that  also  covers 
money,  currency,  and  deposits  of  all  kinds  with  bankers, 
made  available  by  checks.  McLeod,  again,  after  defin- 
ing "price  "  to  mean  the  amount  agreed  to  be  paid  and 
accepted  on  a  bargain  for  the  purchase  and  sale  of  an 
article  or  quantity  of  articles,  and  "  value  "  as  the  aver- 
age of  such  bargains,  continually  uses  the  terms  indis- 
criminately. 

There  is  no  class  of  writers  who  so  continually  abuse 
economic  terms,  or  who  beget  so  much  confusion  of 
thought,  and  do  so  much  injury  to  science  and  legislation, 
as  the  writers  of  "  money  articles  "  for  the  press.  These 
gentlemen  invariably  mix  up,  in  the  most  indiscriminate 
manner,  "  currency,"  "  money,"  and  "  loans."  They  per- 
sistently confound  the  "  money  market  "  with  the  "  loan 
market,"  and  "capital"  with  "money,"  when  they  speak 
of  the  rate  of  interest  on  money  instead  of  on  capital  or 
trading  power.  The  idea  that  when  a  man  makes  a  loan 
he  borrows  capital,  not  money,  never  occurs  to  them. 


INTRODUCTION.  3 

The  late  Mr.  Bageat,  the  banker,  and  proprietor  of 
"The  London  Economist,"  Professor  Price  says,  used  the 
word  "money"  in  six  different  senses.  The  word  "in- 
trinsic," as  applied  to  value,  is  another  prolific  instance 
of  the  misconception  of  terms.  It  is  continually  used  for 
market  value,  which  is  what  economists  have  chiefly  to 
do  with.  "  Intrinsic  "  refers  to  quality,  or  the  fitness  of  a 
commodity  for  any  particular  use  or  uses.  It  is  what 
Adam  Smith  defines,  "value  in  use."  But  this  sort  of 
value  does  not  determine  "  market  value."  The  market 
value  of  diamonds  and  other  jewels  is  many  times  that 
of  gold,  but  gold  is  vastly  more  valuable  in  use.  The 
same  is  true  of  steel  and  iron  as  compared  with  gold. 
The  latter  is  several  thousand  times  more  valuable,  in 
the  estimate  of  the  market,  than  steel ;  but  the  latter  is 
infinitely  more  valuable  intrinsically.  The  one  kind  of 
value  relates  to  quality,  and  is  innate  ;  the  other  to  the 
price  in  the  markets.  The  intrinsic  value  of  gold  con- 
sists in  its  peculiar  adaptation  for  money  and  jewelry. 

In  Chap.  II.  I  have  treated  specially  of  some  of  the 
terms,  and  the  principles  defined  by  them,  and  hope  that 
I  have  in  all  cases  avoided  the  habit  of  using  the  same 
word  to  convey  distinctly  separate  meanings,  meant  to 
be  conveyed. 


CURRENCY. 


CHAPTER   I. 

PRINCIPLES   AND   POSTULATES    OF    MONETARY   SCIENCE. 

i .  Money  is  any  thing  possessing  market  value,  which 
all  the  members  of  a  community,  by  common  consent, 
are  willing  to  accept  in  payment  for  their  labor,  goods, 
lands,  etc. 

2.  All  civilized  nations,  by  such  common  consent,  have 
fabricated  their  money,  or  the  chief  part  of  it,  out  of 
gold  and  silver,  or  one  of  these  metals,  because  of  their 
peculiar  fitness  for  coinage  and  use. 

3.  Money  is  a  commodity,  and  possesses  a  market 
value  of  its  own,  independent  of  the  material  of  which  it 
is  made ;  and,  like  such  material,  its  market  value  is  gov- 
erned by  its  volume,  or  supply  and  demand. 

4.  The  value  of  money,  or  of  any  other  commodity, 
is  in  the  inverse  ratio  of  its  volume  (Chaps.  IV., 
XXIV.). 

5.  By  combining  the  two  values,  that  is,  the  value  of 
the  material  (in  the  case  of  the  precious  metals)  in  a  coin, 
and  making  the  coin  and  the  bullion  interconvertible, 
without  charge  for  coinage,  or  limiting  such  charge  to  the 
cost  of  coinage,  the  value  of  the  coin  and  the  metal  will 
always  tend  to  equilibrium. 

6.  Money,  by  its  trading  or  exchange  value,  distributes 

5 


6  CURRENCY. 

goods  from  producers  to  consumers,  and  abolishes  barter, 
or  the  exchange  of  commodities  in  specific  quantities. 

7.  Money,  being  made  legal  tender  for  debts  by  the 
state,  and  universally  accepted  as  the  measure  of  the 
value  of  all  other  things,  serves  to  differentiate  the  value  of 
labor,  and  all  other  things  having  market  value  in  respect 
to  each  other  (Chap.  XXVII.) . 

8.  The  stamp  of  the  mint  or  state  serves  only  to  estab- 
lish the  fineness  and  denomination  of  the  coins,  and  the 
legal  value  set  on  it  by  law,  but  adds  nothing  to  its 
market  value. 

9.  The  denominations  so  stamped  on  the  various  coins, 
constitute  a  scale  for  measuring  and  differentiating  the 
value  of  other  things,  similar  in  principle  to  the  scales 
used  in  measuring  length,  capacity,  and  weight. 

10.  A  shilling  cannot  be  made  to  circulate  or  exchange 
for  a  sovereign  or  half-eagle  by  transferring  the  stamp  of 
the  mint  from  the  latter  coins  to  the  former ;  nor  can  a 
sovereign  be  held  in  circulation  as  a  shilling  by  being 
stamped  as  a  shilling.  The  "  legal-tender  "  iron  money 
of  Sparta  passed  for  its  market  value  as  iron. 

n.  Trading  (usually  termed  purchasing)  Power  con- 
sists of  the  market  value  of  the  products  of  labor  in  course 
of  preparation,  and  transmission  from  producers  to  con- 
sumers, and  is  utilized  and  dealt  in,  in  the  loan  market, 
by  means  of  bills  of  exchange,  and  other  securities  repre- 
senting the  value  of  goods,  and  money,  which  forms  a 
part  of  Trading  Power. 

12.  Paper  Money,  if  sold  for  its  nominal  or  "face 
value  "  in  metallic  money,  to  banks  and  the  public,  will 
never  depreciate,  or  be  in  excess  of  the  requirements  of 
the  people,  so  long  as  an  adequate  amount  of  metallic 
money,  to  be  determined  by  experience,  is  held  to  insure 
its  convertibility  under  all  circumstances. 

13.  Inconvertible  Paper  Money,  whether  legal  tender 


PRINCIPLES   AND   POSTULATES    OF   MONETARY    SCIENCE.       7 

or  not,  is  regulated  in  its  market  value  wholly  by  supply 
and  demand,  or  by  limitation  of  its  volume  (Chap.  V.  pars. 
14,  15)- 

14.  Inconvertible  Paper  Money,  or  Debased  or  Over- 
valued Metallic  Money,  when  made  Legal  Tender,  and 
issued  in  full  supply  of  the  requirements  of  industry,  in- 
variably drives  a  superior  or  properly  valued  currency  out 
of  circulation.  This  is  known  as  the  Gresham  Law, 
from  the  fact  that  it  was  first  proclaimed  by  Sir  Thomas 
Gresham. 

15.  Whenever  an  inconvertible  paper  currency  has 
come  to  fill  all  the  channels  of  circulation,  its  Trading 
Power  becomes  unstable,  and  subject  to  fluctuations  in 
its  market  value. 

16.  When  the  market  value  of  such  a  currency  has 
fallen  below  the  standard  of  metallic  money,  its  Trading 
Power  will  be  in  the  inverse  ratio  of  its  volume. 

17.  By  withdrawing  from  circulation  a  percentage  of 
its  volume  equal  to  the  percentage  of  its  depreciation, 
the  remainder  will  return  to  par. 

18.  A  state  issue  and  sale  of  notes  for  gold,  at  par,  all 
other  issues  being  prohibited,  will  prevent  an  over-supply, 
and  avert  depreciation  (postulate  12). 

19.  A  State  Issue  Department,  by  purchasing  for  coin 
or  notes,  all  the  bullion  or  metal  used  as  a  standard  of 
value  offered  to  it,  and  coining  the  same,  will  be  an  auto- 
matic regulator  of  both  kinds  of  money,  metallic  and 
paper,  under  the  action  of  supply  and  demand  (Chaps. 
XVII.,  XVIII.) . 

20.  When  a  state  refuses  to  receive  its  own  inconverti- 
ble notes  in  payment  of  any  part  of  the  taxes  levied  on 
the  public,  it  discredits  and  lowers  the  value  of  its  obliga- 
tions pro  tanto  (Chap.  XXI.  p.  4). 

21.  When  a  superior  currency  has  been  driven  out  of 
circulation   by  an   inferior   legal-tender  currency,  it  will 


8  CURRENCY. 

always  be  quoted  at  a  premium.  When  the  inferior  cur- 
rency is  not  legal  tender,  the  reverse  will  happen,  as  in 
the  case  of  California,  where  the  people,  by  universal 
agreement,  refused  to  buy  or  sell  by  the  paper  standard. 

22.  When  the  gap  between  the  two  currencies  has  not 
become  too  wide  through  the  redundancy  of  paper  issues, 
the  trading  power  of  the  paper,  if  the  volume  is  held  sta- 
tionary, will  be  gradually  raised  to  par  by  the  natural  laws 
of  industry,  or  the  increased  demand  for  currency,  caused 
by  the  growth  and  development  of  business.  This  is 
what  has  recently  happened  in  the  United  States. 

23.  When  the  total  amount  of  currency  actually  re- 
quired by  the  people  to  conduct  their  industries,  as  indi- 
cated by  the  natural  laws,  consists  partly  of  gold  coin  of 
full  weight  and  fineness,  and  partly  silver  coin,  overvalued, 
and  partly  of  inconvertible  paper,  held  at  par  of  gold, 
by  limitation  of  issue  (which  condition  of  things  has 
existed  for  some  years  in  France),  the  three  kinds  of 
currency  will  circulate  on  the  same  level  of  market  value, 
and  will  possess  equal  trading  power. 

24.  If  either  the  overvalued  silver,  or  the  legal-tender 
paper,  or  the  two  together,  be  so  increased  as  to  make  in 
themselves  a  full  supply  for  industrial  purposes,  the  prop- 
erly valued  gold  currency  will  be  driven  out  of  circulation 
in  conformity  with  the  so-called  "  Gresham  Law,"  and 
gold  coin  will  be  dealt  in  as  bullion.  If  the  irredeem- 
able paper  be  still  further  increased  in  volume,  as  in  the 
United  States  in  1862,  so  as  to  overrun  the  demands  of 
industry  for  currency,  the  silver  coin  will  follow  the  gold, 
and  be  dealt  in  at  its  bullion  value,  under  the  action  of 
the  natural  laws. 

25.  The  first  indication  of  an  excess  of  irredeemable 
paper  currency  becomes  apparent  by  a  rise  in  the  foreign 
exchanges  and  a  corresponding  premium  in  gold. 

26.  Theory  and   Practice    coincide    in   demonstrating 


PRINCIPLES   AND    POSTULATES    OF    MONETARY    SCIENCE.       9 

that  gold  is  the  most  convenient  and  the  best  known 
metal,  suited  to  coinage,  for  the  purposes  of  a  standard 
measure  of  value  (Chap.  V.). 

27.  In  like  manner  silver  has  been  demonstrated  to 
be  the  best  metal  out  of  which  to  fabricate  the  chief 
part  of  subsidiary  coins,  and  copper  and  nickel  for  those 
of  still  lower  values. 

28.  An  inconvertible  paper  currency  depends  wholly 
on  its  volume  for  its  market  value,  and  is  deficient  in  the 
most  important  element  of  a  sound  currency,  namely,  the 
utmost  attainable  stability. 

29.  The  ratio  between  the  market  values  of  gold  and 
silver,  or  any  other  two  products  of  labor,  or  commodi- 
ties, where  there  is  no  limitation  of  production,  or,  in 
the  case  of  the  precious  metals,  of  coinage,  cannot  be 
established  by  law  of  Parliament,  or  of  all  nations ;  be- 
cause the  natural  laws  in  the  long  run  assert  their  ascend- 
ency over  human  laws. 

30.  All  legislative  attempts  to  set  an  arbitrary  and  ficti- 
tious value  on  money  or  commodities  have  ultimately 
failed  in  free  communities,  for  the  people  cannot  be 
compelled  to  part  with  their  labor  or  goods  without  ade- 
quate value. 

31.  When  a  depreciated  currency  has  been  brought 
up  to  the  par  of  gold  by  the  methods  of  contraction 
mentioned  in  former  postulates,  the  superior  or  natural 
currency  will  be  drawn  back  to  the  country,  and,  together 
with  new  coinage,  will  enter  into  circulation  along  with 
the  paper.1 

32.  The  quantity  of  money,  metallic  and  paper,  under 
a  well-regulated  monetary  system,  used  in  conducting  the 

1  The  large  importations  of  American  gold  coin  (which  was  sent  abroad  dur- 
ing the  late  war  to  purchase  goods  and  supplies)  during  the  year  1879,  amounting 
to  over  seventy  millions  of  dollars,  including  bullion,  notwithstanding  a  home 
production  of  that  metal  of  fully  thirty-five  million  more  and  an  equal  value  of 
silver,  proves  this  postulate. 


IO  CURRENCY. 

industries  of  the  people,  can  only  be  properly  regulated 
by  giving  the  utmost  freedom  to  the  action  of  the  great 
natural  law  of  supply  and  demand ;  and  its  volume  does 
not,  in  a  commercial  country,  vary  much  from  three  to 
five  per  cent  of  the  gross  sum  of  trading  power,  of  which 
it  forms  a  part. 

33.  The  money  market,  the  stock  market,  the  loan 
market,  and  the  coin,  produce,  and  all  other  markets  or 
places  where  any  thing  is  sold  and  bought,  are  separate 
and  distinct  from  each  other,  both  in  practice  and  prin- 
ciple, and  should  always  be  so  treated  by  writers  and 
speakers  (Chap.  XIII.  pars.  6,  7). 

34.  The  prerogative  or  right  to  coin  money  and  regu- 
late its  legal  denominations,  and  to  issue  paper  money, 
belongs  to  the  state,  and  rests  on  the  same  authority  and 
necessity  as  the  right  of  the  state  to  regulate  measures  of 
weight,  length,  and  capacity  (Chap.  XXL).1 

35.  Commodities  in  transit  from  producers  to  con- 
sumers, or  ultimate  purchasers,  represented  by  bills  of 
exchange,  bills  of  lading,  warehousemen's  receipts,  bank 
credits,  checks,  and  other  devices  invented  by  bankers 
and  merchants  to  facilitate  the  transfer  of  debts  and 
credits  or  property,  constitute  the  bulk  of  the  floating 
capital,  or  trading  power,  dealt  in,  in  the  loan  (improp- 
erly called  the  money)  market. 

36.  Floating  or  trading  power,  other  than  that  speci- 
fied in  the  last  postulate,  consists  of  money  and  capital 

1  Daniel  Webster,  the  eminent  American  statesman,  in  his  speech  on  the  cur- 
rency delivered  in  the  United  States  Senate,  28th  September,  1837,  postulated  this 
proposition  in  the  following  striking  words:  — 

"  It  is  the  constitutional  duty  of  government  to  see  that  a  proper  currency, 
suitable  to  the  circumstances  of  the  times  and  to  the  wants  of  trade  and  business, 
as  well  as  to  the  payment  of  the  debts  due  to  the  government,  be  maintained  and 
preserved,  —  a  currency  of  general  credit,  and  capable  of  aiding  the  operations  of 
government  so  far  as  those  operations  may  be  conducted  by  means  of  the  circu- 
lating medium;  and  that  these  are  duties,  therefore,  devolving  on  Congress,  in 
relation  to  currency,  beyond  the  mere  regulation  of  the  gold  and  silver  coins." 


PRINCIPLES   AND    POSTULATES    OF    MONETARY    SCIENCE.       II 

accumulated  from  the  savings  of  labor,  the  surplus  of 
income  over  expenditure,  and  all  other  sources  not  yet 
invested  in  more  permanent  things,  such  as  lands,  houses, 
factories,  steamships,  and  all  manner  of  joint-stock  com- 
panies' shares,  or  continuing  undertakings,  which  per- 
petuate themselves  under  prudent  management,  or  are 
not  destroyed  in  use. 

37.  The  floating  capital  specified  in  the  last  postulate 
is  commonly  held  by  banks,  loan  companies,  discount 
houses,  and  merchants  receiving  deposits,  and  hence 
forms  a  part  of  the  great  fund  or  ocean  of  trading  power, 
or  capital,  called  the  loan  market,  and  is  continually 
seeking  more  permanent  forms  of  investment ;  and  these 
constitute  the  "  safety  valve  "  of  that  market,  by  dimin- 
ishing over-speculation  (note  III.). 

38.  The  true  and  natural  regulator  of  the  rate  of  in- 
terest, or  price  paid  for  capital,  is  the  law  of  supply  and 
demand. 

39.  All  artificial  or  legislative  methods  intended  to  fix 
the  rate  of  interest,  or  regulate  the  price  of  capital,  or 
wages,  or  hours  of  labor,  or  its  products,  are  violations  of 
the  natural  laws  of  industry,  and  fundamentally  wrong, 
and  result  from  ignorance  (Chap.  XIII.  par.  10). 

40.  Supply  and  demand  in  monetary  science  are  the 
opposing  sides  of  the  equation  between  production  and 
consumption.  Supply  may  be  stated  as  representing 
labor  and  capital,  aided  and  set  in  motion  by  skill  and 
machinery  ;  and  demand  as  representing  consumption  or 
investment  (Chap.  IV.,  on  value). 

41.  There  can  be  no  selling  without  buying;  and  each 
party  to  a  bargain  for  the  exchange  of  things  having  value, 
is  both  buyer  and  seller. 

42.  The  domestic  trade  of  a  country  is  a  trade  carried 
on  between  the  individual,  corporations,  and  firms  of  such 
country,  amongst  themselves  (Chap.  XII.,  on  balance  of 
trade). 


1 2  CURRENCY. 

43.  Foreign  trade  is  a  trade  carried  on  between  the 
individuals,  corporations,  and  firms  of  one  country  with 
those  of  other  countries. 

44.  All  trade  continually  tends  to  balance  itself,  or  to 
equilibrium ;  hence,  the  so-called  "  balance  of  trade " 
between  nations  is  merely  a  matter  of  account  between 
trading  firms,  individuals,  and  corporations,  which  always 
balances  itself,  with  the  same  accuracy  as  the  two  sides 
of  a  merchant's  or  banker's  ledger.  Hence,  the  assump- 
tion that  the  foreign  trade  of  a  country  can  be  perma- 
nently in  favor  of,  or  against  it,  is  a  fundamental  error 
and  a  delusion  (Chap.  XII.). 

45.  All  taxes  and  restrictions  imposed  by  law,  or  by 
corporations  possessed  of  large  financial  power,  on  one  or 
more  classes  of  foreign  commodities,  for  the  advantage 
and  encouragement  of  those  engaged  in  their  production 
at  home,  are  violations  of  the  natural  laws  of  industry; 
and  the  laws  imposing  such  taxes  and  restrictions  are 
mere  usurpations,  by  the  crafty  and  powerful,  of  the 
natural  and  inalienable  rights  of  man. 

46.  The  true,  fundamental,  and  self-evident  principles 
of  trade  are  to  buy  and  borrow  in  the  cheapest,  and  sell 
and  lend  in  the  dearest  markets,  domestic  or  foreign,  — 
all  other  things,  such  as  the  character  of  the  pay  and  the 
security,  being  equal.  The  laws  of  nature,  like  the  laws 
of  nature's  God,  know  no  boundaries. 

47.  All  sound  trade  is  founded  on  the  theory  of  mutual 
and  reciprocal  profit  and  advantage  to  the  parties  con- 
cerned (Chap.  XII.). 

48.  Every  thing  dealt  in,  in  the  domestic  and  foreign 
markets,  exerts  an  influence  on  the  price  of  capital,  labor, 
and  commodities  (the  "precious  metals"  included),  in 
the  exact  ratios  of  their  gross  market  values  respectively, 
or,  in  the  proportion  that  their  respective  gross  market 
values  bear  to  the  sum  total  of  value  as  estimated  by  the 
measure  of  money  (Chap.  XL). 


PRINCIPLES   AND   POSTULATES   OF   MONETARY   SCIENCE.       13 

49.  The  primary  object  and  end  of  paper  money  is  to 
supply  the  people  with  a  better  and  more  convenient  and 
available  tool  of  industry  than  metallic  money  (Chap. 
XIII.  par.  12,  Chap.  XV.  par.  13,  and  Chap.  XVII.). 

50.  Sound  practice  and  theory  demand  that  the  profit 
derived  from  the  issue  of  paper  money  shall  be  regarded 
only  as  incide7ital  and  secondary  ;  and  the  delegating,  by 
the  state,  the  right  to  issue  paper  money  to  corporations 
or  individuals,  without  payment  in  full  to  the  nation,  is 
fundamentally  wrong  (Chap.  XV.  par.  13). 

5 1 .  When  the  state  delegates  its  prerogative  to  a  class 
of  corporations  to  issue  paper  money,  or  lends  "  national 
currency "  to  such  corporations,  at  a  price  below  the 
market  price  of  capital,  and  permits  such  corporate 
bodies  to  regulate  the  volume  of  such  issues,  instead  of 
leaving  it  to  the  natural  regulator,  supply  and  demand,  it 
violates  the  most  important  of  the  natural  laws,  the  law 
of  equal  rights  (Chap.  XIII.  par.  n). 

52.  The  notes  of  a  state  or  bank,  not  issued  on  gold, 
cannot  properly  be  made  legal  tender ;  and  no  notes  can 
properly  be  treated  by  the  issuer  as  good  cash  reserve 
against  liabilities. 

53.  The  Issue  Department  of  the  Bank  of  England  is, 
by  operation  of  law,  a  state  department  managed  by  a 
committee  of  directors  of  that  bank,  on  its  premises  ;  and 
the  bank,  by  a  bargain  made  with  the  state  a  century  and 
three-quarters  ago,  has  all  its  proprietary  capital  invested 
in  public  securities,  and  is  enabled  to  own  the  face  value 
of  such  investment,  in  paper  money,  not  covered  by 
metal,  which  it  is  most  obviously  improperly  allowed 
to  issue,  and  which  constitutes  its  trading  "  reserve " 
(chapters  on  Theory  and  Practice  of  the  Bank  of  Eng- 
land). 

54.  The  national  banks  of  the  United  States  have,  with 
only  a  few  exceptions,  the  whole  or  greater  part  of  their 


14  CURRENCY. 

capital  invested  in  government  securities,  and  are  enabled 
to  own  ninety  per  cent  of  the  face  of  such  securities  in 
money  or  "  national  currency,"  which  compels  them  to 
rely  on  depositors,  or  other  folks'  capital,  for  cash  re- 
serve ;  which  is  an  absurdity,  and  leads  to  over-issues  and 
inflation. 

55.  The  plan  of  allowing  banks  to  issue  paper  money 
on  securities,  is  one  whereby  a  man  can  possess  himself 
of  a  valuable  investment,  and  at  the  same  time  have 
its  value  in  money ;  which  is  absurd,  and  is  known  as 
"  Lawism,"  after  its  most  distinguished  advocate,  the 
eminent  Scotch  financier,  John  Law. 

56.  Metallic  money  represents  and  measures  value. 

5  7.  Convertible  paper  money  represents  metallic  money. 

58.  Inconvertible  legal-tender  paper  money  represents 
nothing  but  the  necessities  of  the  people  for  currency, 
from  which  it  derives  its  ability  to  circulate  {vide  Mr.  J. 
B.  McCulloch's  notes  on  the  Wealth  of  Nations). 

59.  Bills  of  exchange  and  other  like  securities  repre- 
sent the  value  of  labor  performed,  or  goods  and  property 
sold  (postulate  35,  Chap.  III.  pars.  14,  15). 

60.  The  issuing  of  paper  money  is  not  a  part  of  bank- 
ing, nor  is  it  in  any  manner  connected  with  the  proper 
and  legitimate  business  of  a  banker  (Chaps.  XV.,  XVI., 
XVII.  par.  16). 

61.  Paper  money  can  only  safely  and  properly  be  in- 
trusted to  the  issue  and  management  of  the  state  through 
a  department  made  independent  of  the  treasury  and  of 
party  and  business  influences  other  than  supply  and 
demand,  and  should  be  issued  only  in  payment  of  metal 
offered  for  coinage  (Chap.  XVIII.  par.  9). 

62.  How  much,  if  any,  of  the  accumulation  of  metal, 
or  metallic  money,  received  in  payment  of  notes,  may  be 
safely  used  for  governmental  purposes,  such  as  the  pay- 
ment of  the  public  debt,   can  only  be  determined  by 


PRINCIPLES   AND    POSTULATES   OF    MONETARY    SCIENCE.       1 5 

observation  and  experience  on  the  part  of  the  managers 
(Chap.  XIV.  par.  13,  also  Chaps.  XIX.,  XXVI.). 

63.  Currency  is  only  a  term  used  to  indicate  money 
in  some  form,  and  ought  always  to  be  limited  and  defined 
in  its  use  or  meaning ;  and  in  no  case  can  it  be  properly 
held  to  cover  bills  of  exchange  or  any  interest-bearing 
security  (Chap.  XIII.).  / 

64.  Banks  and  bankers  are  intermediary  agents,  or 
brokers,  between  producers  and  consumers  (Professor 
Price  on  Banking,  and  Chap.  III.  par.  13). 

65.  The  principal  business  of  a  banker  is  to  turn  the 
market  value  of  goods,  in  course  of  production  and  dis- 
tribution, into  trading  power,  by  "discounting"  bills  and 
other  securities  founded  on  goods  or  growing  out  of 
industry ;  and  receiving  and  lending  the  accumulated 
savings  of  past  industries  (Chap.  III.  par.  13,  Chap.  XIV. 
.par.  3,  and  Chap.  XV.). 

66.  Nearly  all  the  advantages  inuring  to  society  from 
banking  have  proceeded  from  banks  of  deposit  and  dis- 
count ;  while  nearly  all  the  evils  inflicted  on  mankind  by 
banks  are  directly  traceable  to  banks  of  issue,  and  the 
over-issues  of  paper  money,  and  excessive  loans  (Chap. 
XV.  par.  3). 

67.  Market  value  is  determined  and  governed  by  sup- 
ply and  demand;  which  is  the  resultant  or  combined 
effect  of  competition  among  productive  laborers,  aided 
by  capital,  skill,  and  machinery  on  the  one  hand,  and 
competition  among  buyers  for  consumption  on  the  other 
hand  (Chap.  XVI.). 

6S.  Labor,  goods,  and  all  other  things  offered  for  sale, 
are  continually  seeking  trading  power,  or  capital;  and 
trading  power,  on  the  other  hand,  is  continually  seeking 
labor,  etc.,  for  the  purpose  of  being  exchanged  (Chap. 
XI.  pars.  8-10). 

69.  Bullion  is  never  used  to  settle,  either  domestic  or 


1 6  CURRENCY. 

foreign  exchange  balances,  so  long  as  any  other  com- 
modity will  afford  a  profit.  It  differs  in  no  way,  in 
scientific  or  practical  effect,  from  other  commodities,  as 
an  article  of  trade  (chapter  on  Balance  of  Trade). 

70.  In  the  general  trade  of  the  world,  bullion,  as  a 
rule,  affords  the  smallest  profit  of  any  commodity  to 
dealers  :  hence  comparatively  few  make  the  business  a 
specialty. 

71.  There  is  a  most  obvious  distinction  between  cur- 
rency and  finance  ;  the  one  being  a  tool  of  industry,  the 
other  a  7net1wd,  or  process  for  conducting  business  opera- 
tions of  nations,  states,  corporations,  private  firms,  and 
individuals.  Hence,  as  a  logical  corollary,  the  issue  of 
notes  should  be  placed  beyond  the  influences  of  those 
who  manage  finance,  which  aims  at  creating  and  using 
resources  (Chap.  XXV.). 


CHAPTER   II. 

LABOR,    CAPITAL,   WEALTH,   SKILL,  AND   MACHINERY. 

i.  These  terms  and  the  conceptions  they  embody  may 
be  said  to  form  the  chief  staples  of  all  works  on  Politi- 
cal Economy.  They  occur  in  almost  every  page,  if  not 
paragraph,  of  such  treatises.  As  material  elements  they 
constitute  the  great  forces  which,  by  long  and  systematic 
action,  have  built  up  the  whole  material,  if  not  moral, 
structure  of  civilized  society.  The  application  of  these 
forces  to  this  end  —  that  is,  to  securing  to  mankind  the 
largest  amount  of  material  comfort  and  moral  culture, 
which  are  the  foundation  of  true  happiness  and  content- 
ment —  may  be  assumed  to  mark  the  line  between  civil- 
ized and  uncivilized  man.  The  science  of  Political 
Economy,  which  instructs  us  in  the  best  methods  of  em- 


LABOR,    CAPITAL,    WEALTH,    SKILL,    AND    MACHINERY.       1 7 

ploying  and  governing  these  mighty  forces,  is  one  of  the 
very  highest  import,  and  ought  to  form  a  part  of  the  sys- 
tem of  education  in  all  schools,  public  and  private,  high 
and  low,  and  of  all  students  whose  capacities  are  equal  to 
comprehension  of  such  topics  as  it  embraces.  There  is, 
I  regret  to  be  obliged  to  say,  one  serious  obstacle  in  the 
way  of  "  general  diffusion  of  knowledge  "  on  this  most 
important  branch  of  education.  It  is  the  want  of  a  well- 
arranged  and  compact  system,  so  compiled  as  to  embody 
in  simple  self-evident  propositions,  or  postulates,  gener- 
ally accepted  and  demonstrated  truths.  The  want  of 
such  an  authoritative  work  still  leaves  us  at  the  mercy 
of  numerous  speculative  writers,  and  instructors,  who  cling 
with  untiring  pertinacity  to  theories  exploded  and  over- 
thrown a  hundred  years  ago  by  Adam  Smith,  in  his  great 
work  "The  Wealth  of  Nations."  On  the  one  hand,  we 
have  the  old  "mercantile  theory,"  which  held,  that  the 
chief  aim  of  a  nation  should  be  to  maintain  by  legisla- 
tive enactments,  controlling  the  private  rights  and  indus- 
tries of  individuals  and  communities,  such  an  industrial 
system  as  will  attract  the  largest  possible  amount  of  the 
precious  metals  to  its  shores.  The  exchanges,  according 
to  this  class  of  philosophers,  must  be  so  "acted  upon" 
by  the  Bank  of  England,  or  the  Bank  of  France,  or  the 
Treasury  or  National  Banks,  of  this,  that,  or  the  other 
country,  as  to  override  and  control  the  natural  laws  of 
trade  and  industry,  and  thus  retain  in  or  attract  to  their 
vaults  a  certain  quantity  of  gold  as  a  tangible  evidence 
of  wealth.  On  this  subject  I  shall  have  more  to  say 
hereafter.  On  the  other  hand,  we  have  another  set  of 
philosophers,  who  propose  to  cut  loose  from  metal  alto- 
gether, and  have  only  stamped  pieces  of  paper,  having 
no  inherent  value,  to  measure  values  generally,  and  circu- 
late and  distribute  all  the  valuable  commodities  of  the 
world,  —  a  currency,  in  fact,  depending  wholly  for  its 
market  value  on  its  volume. 


I 8  CURRENCY. 

2.  With  these  few  general  remarks  I  set  out  upon  the 
consideration  of  the  terms  set  at  the  head  of  this  chap- 
ter, and  the  forces  they  embody,  so  far  as  they  bear  on 
the  subject  of  monetary  science,  as  a  starting-point ;  and, 
to  mark  the  importance  of  the  subject-matter  of  this 
chapter,  I  submit  the  following  formula  or  proposition 
as  fundamental :  "  The  civilization  of  a  country  is  always 
in  the  exact  ratio  of  the  quantity  of  labor,  capital,  and 
machinery  employed  in  the  production  of  wealth,  and  the 
degree  of  skill,  and  freedom  from  artificial  and  legislative 
restraints,  imposed  on  their  '  employment.'  " 

3.  In  respect  to  these  great  elements,  or  forces  of  civ- 
ilization, a  full  and  completely  reasoned-out  system, 
founded  on  accurate  analysis,  would  give  us  just  what 
is  so  much  needed  to  perfect  the  labors  of  Adam  Smith, 
and  others  who  have  since  his  time  endeavored  to  finish 
what  he  so  well  began.  Here  let  me  disclaim  any  pur- 
pose to  attempt  such  an  undertaking.  I  only  aim  in 
these  pages  to  apply  certain  general  principles,  which  I 
have  postulated  for  convenience  of  application  and  refer- 
ence, to  the  present  defective  .monetary  systems  of  two 
or  three  of  the  leading  commercial  nations  of  the  world. 
In  doing  so,  I  shall  use  such  powers  as  I  possess  in  ana- 
lyzing these  systems,  and  pointing  out  remedies  which 
seem  to  me  to  lie  on  the  very  surface,  and  are  capable 
of  application  without  disturbing  the  industries  of  any 
one  of  the  communities  in  question,  and  bearing  as  lightly 
as  possible  on  mere  ignorant  prejudices.  I  shall  insist : 
1st,  That  we  must  get  absolutely  rid  of  all  artificial  inter- 
ferences with  the  natural  law  of  demand  and  supply, 
whether  they  emanate  from  banks,  combinations  of  capi- 
tal of  any  kind,  or  the  state.  2d,  That  gold  is  the  best 
material  out  of  which  to  fabricate  our  money  so  far  as  it 
is  used  as  a  standard  of  value.  3d,  That  the  state  right- 
fully reserves  to  itself  the  power  or  prerogative  to  supply 


LABOR,    CAPITAL,    WEALTH,    SKILL,    AND    MACHINERY.       10 

all  the  metallic  money  needed.  4th,  That  paper  money, 
being  only  a  more  convenient  tool  of  commerce  and  in- 
dustry, shall,  for  the  same  reasons,  be  also  supplied  by 
the  state,  and  be  issued  directly  to  the  people  in  pay- 
ment of  metal  for  coinage.  5th,  That  the  state  shall 
create  a  department  clothed  with  adequate  powers,  and 
supplied  with  abundant  resources,  to  maintain  the  con- 
vertibility of  all  paper  money  thus  issued  to  the  public 
on  presentation  to  such  department,  or  its  agencies,  in 
case  any  of  the  metal  received  for  paper  shall  be  sold. 
6th,  That  neither  banks  nor  commercial  houses  of  any 
kind  shall  be  employed  as  agents  of  the  state  for  the 
issue  and  redemption  of  such  paper  money  as  the  public 
shall  require.  7th,  That  such  state  department  shall  not 
be  under  the  control  or  influence  of  the  minister  or  sec- 
retary of  finance.  8th,  That  the  money  department  shall 
be  the  custodian  of  all  taxes  and  loans  raised  by  the 
state,  which  shall  be  paid  in  by  the  officers  or  agents 
collecting  or  raising  the  same,  and  shall  be  checked  out, 
under  authority  of  law,  by  the  departments,  as  at  present 
or  as  may  be  provided  for.  9th,  That  all  banks  now 
authorized  to  receive  and  issue  for  their  own  account  and 
advantage  treasury  or  state  notes,  shall  be  equitably  com- 
pensated, and  their  circulation  withdrawn,  and  the  chan- 
nels of  such  circulation  be  filled,  pari  passu,  with  state 
notes  supplied  directly  to  the  public  in  payments  of  metal, 
according  to  the  demand  for  them. 

4.  The  arguments  in  support  of  this  briefly  stated  out- 
line of  a  more  perfectly  constructed  monetary  system 
will  form  the  greater  part  of  this  work.  I  turn  now  to 
the  meaning  I  shall  attach  to  the  several  terms  used  to 
express  the  industrial  forces  of  society  which  head  this 
chapter.  First,  unless  otherwise  limited  or  expressed,  I 
shall  use  the  term  labor  in  the  sense  of  manual  labor, 
of  which  there  are  two  grand  divisions,  usually  termed 


20  CURRENCY. 

"skilled"  and  "unskilled,"  both  of  which  are  more  or 
less  governed  by  mere  habitual  routine.  But  the  word 
has  a  far  more  extensive  application.  The  human  race, 
with  the  exception  of  an  extremely  limited  number  who 
may  be  called  the  drones,  or  useless  members  of  society, 
labor  in  some  form  or  other  with  their  hands  or  their 
brains,  their  body,  their  mind,  or  both.  These  are  un- 
questionably the  natural  and  healthy  conditions  of  both 
men  and  women,  and  none  should  envy  the  lot  of  purely 
idle  people. 

5 .  Capital  and  wealth,  if  not  identical  in  their  largest 
senses,  are  so  nearly  allied,  or  so  nearly  cover  the  same 
ground  in  the  field  of  Political  Economy,  as  to  make  it 
difficult  to  mark  out  separate  and  distinguishing  bounda- 
ries between  them.  I  speak  of  the  terms  in  an  abstract 
sense.  It  is  easy  to  limit  or  extend  the  meaning  of  either 
term.  I  cannot  undertake  to  collate  the  various  defini- 
tions, for  instance,  applied  to  the  word  "  capital "  by  au- 
thorities of  high  standing  on  economic  science.  One 
says,  "it  consists  of  the  general  surplus  income  over 
outgo  ;  "  another,  that  "  it  is  the  savings  and  accumula- 
tions of  labor ;  "  another,  of  trade  ;  others  again  make 
an  arbitrary  distinction  between  capital  and  wealth,  and 
insist  that  "  only  such  things  can  be  called  capital  as  are 
used  in  producing  and  distributing  commodities." 

6.  A  late  writer,  Mr.  Thomson  Hankey,  in  his  work  on 
"  Banking  and  Currency,"  at  p.  44  defines  capital  to  be 
"  any  and  every  kind  of  accumulation  of  useful  and  ex- 
changeable property."  This  might  be  accepted  by  read- 
ers of  his  book  as  a  very  good  and  comprehensive 
definition;  but  Mr.  Hankey  himself,  in  the  very  next 
paragraph,  spoils  the  sense  of  it  by  a  new  and  totally 
different  definition  of  the  word,  or  of  the  sense  given  it 
in  his  first  description  of  what  he  means.  He  says,  "  Now, 
it  should  always  be  borne  in  mind,  that  no  fresh  capital 


LABOR,    CAPITAL,    WEALTH,    SKILL,   AND   MACHINERY.       21 

can  be  obtained,  excepting  from  the  same  source  from 
which  all  capital  is  originally  derived ;  namely,  the  excess 
of  income  or  production  over  expenditure." 

According  to  the  first  definition,  the  gross  products  of 
labor,  aided  more  or  less,  as  the  case  may  be,  by  capital 
and  machinery,  constitute  capital ;  that  is,  provided  such 
products  consist  of  an  "accumulation  of  exchangeable 
property,"  or,  as  I  would  express  it,  "provided  they  pos- 
sess market  value." 

7.  From  the  latter  definition  or  application  of  mean- 
ing, Mr.  Hankey  in  another  paragraph  infers,  that  "  in 
a  primitive  state  of  society,  where  the  community  con- 
sumes immediately  or  presently  all  the  produce  of  its 
labor,  there  can  be  no  such  thing  as  capital."  These 
extracts  serve  to  show  how  easy  it  is  to  fall  into  inaccu- 
rate and  loose  methods  of  reasoning,  by  having  no  clear 
perception  of  the  definition  of  even  the  most  commonly 
used  terms  in  deductive  and  inductive  sciences.  It  is 
not  true  in  fact,  that  "there  can  be  no  such  thing  as 
capital  in  a  society  where  the  community  consumes  im- 
mediately or  presently  all  the  produce  of  its  labor,"  for 
the  simple  reason  so  well  expressed  by  Mr.  Hankey  him- 
self, that  "  any  and  every  kind  of  accumulation  of  useful 
or  exchangeable  property"  constitutes  "capital."  The 
truth  is,  capital  exists,  and  is  augmented  in  many  ways 
independently  of  the  "  excess  of  income  or  production 
over  expenditure."  The  property  in  new  inventions,  and 
the  discovery  of  new  mines  of  valuable  minerals,  such  as 
iron,  copper,  gold,  silver,  coal,  and  a  long  list  of  other 
like  things,  and  the  enhanced  market  value  of  lands  and 
commodities,  probably  furnish  as  large  a  share  of  capital, 
according  to  Mr.  Hankey's  first  and  most  correct  defi- 
nition, as  the  average  "  excess  of  income  or  production 
over  expenditure."  But  furthermore,  capital  exists  inde- 
pendent of  "accumulation,"  which  is   only  needful  to 


2  2  CURRENCY. 

make  it  available   for  the   purposes   of  convenience    or 
manufacturers. 

8.  I  might  cite  numerous  other  examples  of  the  want 
of  accuracy  in  defining  this  and  other  equally  important 
terms  in  constant  use  among  writers  and  speakers  on 
economic  subjects ;  but  these  will  suffice  to  show  the  de- 
sirability of  establishing  some  standard  authority  to  guide 
us  in  reaching  accurate  conclusions.  Capital,  by  long 
usage,  has  come  to  comprehend  every  thing  possessing 
"  market  value,"  a  term  to  which  I  shall  devote  some 
space  hereafter.  In  this  broad  sense,  the  word  has  come 
to  be  synonymous  with  wealth  in  whatever  form  it  exists, 
or  has  a  market  or  "  exchange  "  value.  But  these  gen- 
eralizations of  terms  need  not  stand  in  the  way  of  accurate 
reasoning,  if  we  only  adopt  and  rigidly  adhere  to  the 
practice  of  limiting  and  qualifying  the  meaning  we  pro- 
pose to  attach  to  terms  in  their  particular  application. 
Wealth  may,  with  propriety,  be  left  to  express  the  market 
value  of  individual  and  national  property  of  every  kind, 
over  indebtedness  or  liability. 

9.  I  have  stated  in  a  former  paragraph  (5),  that  capi- 
tal and  wealth  in  their  largest  popular  acceptations  cover 
nearly  the  same  ground  in  the  field  of  Political  Economy. 
This  statement  requires  some  explanation,  or  perhaps 
modification.  The  general  acceptation  of  capital  is  any 
thing  possessing  market  value  or  trading  power.  The 
idea  attached  to  wealth  is  opulence,  riches,  property. 
Now,  these  terms  all  imply  market  value  ;  and  every  tiling 
possessing  such  value  becomes  trading  power  or  capital. 
In  these  senses  wealth  is  capital,  and  capital  is  wealth. 
A  man's  reputation  or  character  has  a  market  value  of 
great  importance  in  commercial  affairs.  Hence,  credit 
founded  on  these  qualities  may  fairly  be  classified  as 
trading  power  or  capital.  But  all  prudent  men,  when 
they  accept  personal  obligations  in  payment  of  goods, 


LABOR,    CAPITAL,    WEALTH,    SKILL,    AND    MACHINERY.       23 

know  or  believe  that  the  goods  will  be  honestly  disposed 
of  to  meet  such  obligation.  In  reality,  then,  it  must  be 
conceded  that  the  goods  themselves  constitute  the  capi- 
tal employed  in  their  distribution.  This  important  princi- 
ple is  clearly  expressed  in  postulate  35,  Chap.  I. 

10.  Before  considering  the  more  restricted  or  limited 
application  and  uses  of  the  term  capital,  I  wish  to  speak 
of  the  great  confusion  of  ideas  prevailing  among  writers 
of  so-called  "money  articles  "  on  the  subject  of  capital 
and  money.  A  knowledge  of  Political  Economy  is  not, 
as  a  rule,  among  the  qualifications  of  gentlemen  employed 
by  the  owners  and  managers  of  newspapers.  Hence, 
there  is  all  but  a  universal  use  of  the  term  "money 
market  "  instead  of  loan  market. 

11.  Floating  capital,  of  which  I  shall  presently  speak, 
or  trading  power,  which  is  a  better  and  more  expressive 
term,  is  what  is  really  dealt  in.  This,  though  convertible 
into  money,  is  not  money,  any  more  than  a  railway  or 
steamship  share,  a  house,  a  horse,  or  any  thing  else  pos- 
sessing market  value,  is  money.  Neither  government, 
railway,  or  any  other  loans  are  paid  in  money,  except  to 
a  very  small  extent.  The  great  French  indemnity  paid 
to  the  Germans,  except  seven  or  eight  per  cent,  was  not 
paid  in  money,  but  in  bills,  which  were  settled  through 
bankers  and  the  clearing-houses,  and  ultimately  will  be 
paid  by  the  products  and  savings  of  French  industry. 
If  the  writers  of  such  articles  would  hold  a  conference, 
and  agree  never  to  speak  of  the  "  money  market "  when 
they  mean  the  loan  market,  nor  of  money  when  the 
proper  word  is  floating  capital,  or,  better  still,  "  trading 
power,"  they  would  do  an  inconceivable  service  to  the 
world.  It  would  at  once  dispel  the  monster  of  delusions 
that  "money  is  scarce  "  or  "  abundant,"  as  the  case  may 
be,  which  has  on  all  occasions  developed  a  vast  crop 
of  charlatan   currency  doctors  who   confound  the  tool 


24  CURRENCY. 

"money"  with  the  tool" capital,"  which  differ  from  each 
other  as  much  as  a  spade  differs  from  a  plough,  or  a  steam- 
engine  from  the  ship  it  propels.  It  must  come  to  such  a 
compact,  if  ever  we  are  to  cure  incipient  statesmen  or 
rank-and-file  legislators  of  the  extraordinary  delusion  that 
capital,  or  trading  power,  which  everybody  seeks  to  ac- 
quire, can  be  made  "  cheap,"  by  simply  manufacturing 
stamped  or  engraved  "  denominations  "  on  pieces  of  paper, 
and  designating  pounds  or  dollars. 


CHAPTER   III. 


CAPITAL  AND    "TRADING   POWER       FURTHER   CONSIDERED. 
ITS  TRANSFER    FROM   ONE   FORM   TO   ANOTHER. 

i.  Floating  capital,  trading  capital,  and  fked  capi- 
tal are  terms  in  constant  use  among  economists  and  mer- 
chants. To  these  I  have  added  "trading  power"  as 
being  a  comprehensive  and  valuable  expression,  defining 
accurately  what  bankers  and  brokers  mostly  deal  in  (see 
postulates  35  and  36).  I  have  pointed  out,  in  the  latter 
part  of  the  last  chapter,  the  absurdity  of  calling  the  things 
dealt  in,  in  the  loan  market,  money,  and  of  treating  money 
and  capital,  or  trading  power,  as  the  same  thing.  It  is 
very  obvious,  that,  though  money  is  capital,  capital  is  not 
money,  except  when  it  is  invested  in  actual  money,  which 
forms  only  an  infinitesimal  part  of  the  huge  sums  meas- 
ured by  money,  and  which  may  be,  though  they  seldom 
are,  converted  into  money.  I  have  defined  capital  gen- 
erally, as  signifying  whatever  possesses  market  value,  or 
will  exchange  for  things  possessing  such  value,  in  a  ratio 
measured  by  money.  But  the  various  inventions  of 
merchants  and  bankers  for  utilizing  capital  render  it 
desirable,  as  well  as  convenient,  in  discussing  questions 


CAPITAL   AND  TRADING   POWER.  25 

of  monetary  science,  to  define  the  particular  forms  in 
which  capital  exists,  and  is  used  in  the  industries  of  the 
people. 

2.  Floating  capital,  as  stated  in  postulates  35  and  36, 
on  analysis,  resolves  itself  into  the  simple  elements  of 
goods  in  the  course  of  production,  manufacture  and  dis- 
tribution to  consumers ;  and  the  accumulated  savings  of 
industry,  which  exist  mostly  in  deposits  with  bankers  and 
discount  houses,  and  are  credited  to  the  owners  in  the 
ledgers  of  bankers  and  those  keeping  such  funds  and 
money ;  or  in  obligations  payable  on  demand,  or  at  a 
specified  time.  It  would  not  be  difficult  for  bankers  to 
give  a  very  accurate  statement  from  their  books,  of  the 
proportions  of  the  two  kinds  of  floating  capital,  or  trad- 
ing power,  held  by  them  at  any  particular  time,  or  to 
make  up  averages  for  specified  periods.  Such  a  state- 
ment would  be  pregnant  with  interest  to  the  scientific 
economist.  It  would  show  what  I  have  postulated ; 
namely,  that  the  greater  part,  by  far,  of  the  trading  power 
dealt  in,  in  the  loan  or  discount  market,  consists  of  the 
goods  themselves,  which  is  turned  into  capital  by  bankers, 
and  is  thus  used  to  produce  and  transfer  them  to  con- 
sumers. This  trading  power,  then,  constitutes  the  chief 
motive  power  or  force  which  propels  the  vast  and  com- 
plicated machinery  of  the  industrial  world. 

3.  Fixed  capital  comes  next  in  order  of  consideration. 
The  term  obviously  applies  only  to  the  things  themselves, 
and  not  to  the  trading  power  used  in  effecting  their  pur- 
chase, which  existed  originally  in  the  forms  indicated  in 
postulates  35  and  36.  I  submit,  that,  in  a  scientific  sense, 
there  exists  no  such  thing  as  fixed  capital  strictly  speak- 
ing, except  in  estates  held  under  entail,  inasmuch  as  the 
lands  or  other  things  of  an  imperishable  nature  may,  like 
goods,  be  used  in  the  loan  market  by  means  of  mortgages. 
It  seems  to  me,  that  the  correct  and  logical  method  of 


26  CURRENCY. 

regarding  fixed  capital  is  to  refer  and  rigidly  confine  the 
idea  of  it  to  such  things  as,  in  themselves,  possess  the 
essential  elements  of  perpetuity,  or  power  of  continued 
existence.  Under  this  category  may  be  classed  lands, 
houses,  factories,  mines,  shares  in  joint-stock  companies, 
and  the  tools  of  industry,  which,  though  perishable,  pos- 
sess the  elements  of  renewal  out  of  profits.  It  is  very 
desirable  that  writers  on  economic  science  should  have 
some  better  general  understanding  in  respect  to  the 
meaning  of  capital,  so  as  to  discriminate  between  the 
position  occupied,  and  the  force  exerted  by  each  kind. 

4.  Cash  capital,  commercially  speaking,  consists  of 
money,  or  what  can  instantaneously  be  converted  into 
money.  No  further  definition  of  the  term  need  be  given  ; 
and  it  ranks  as  a  postulate.  This  proposition  will  receive 
great  consideration  when  I  come  to  treat  of  the  Bank  of 
England,  and  its  traditional  policy  of  trading  on  its  own 
share  of  the  note  issue,  and  treating  such  notes  as  good 
"  cash  reserve,"  because  the  Bank  can  get  cash  for  them, 
when  it  ought  only  to  get  the  securities  they  are  issued 
on. 

5.  The  term  "cash,"  properly  speaking,  applies  only 
to  money,  a  certain  quantity  of  which  should  always  be 
at  the  command  of  bankers  and  other  traders.  If  it  is 
intended  to  give  it  a  wider  signification,  care  should 
always  be  taken  to  specify  the  exact  limitation  intended 
to  be  set  upon  it.  When  I  use  the  word,  I  shall  use  it 
in  the  commercial  sense,  as  defined  in  the  last  paragraph. 
When  I  use  the  word  money,  I  mean  by  it  the  metallic 
money  made  legal  tender,  and  the  measure  and  standard 
of  value  ;  and  circulating  notes  used  as  currency,  I  desig- 
as  "paper  money." 

6.  While  treating  of  capital,  I  will  now  only  remark, 
that,  when  it  is  invested  in  money  of  any  kind,  it  is  in- 
vested in  the  least  profitable  form.     Hence,  all  business 


CAPITAL  AND   TRADING   POWER.  27 

men  seek  to  part  with  money  as  soon  as  they  can  find 
something  that  will  yield  a  profit ;  as  money  in  the  till  or 
in  hand  yields  nothing.  As  a  general  rule,  the  importa- 
tion of  money,  or  the  bullion  out  of  which  it  is  manu- 
factured, is  an  indication  of  an  unhealthy  state  of  trade. 
A  certain  quantity  of  the  precious  metals  is  necessary  for 
coinage  and  use  as  money.  All  beyond  that  represents 
unemployed  capital.  This  is  fundamental,  and  demonstra- 
bly overthrows  the  specious  arguments  in  favor  of  the 
"mercantile  theory"  of  trade,  which  held  that  trade  must 
be  so  controlled  by  the  state  as  to  force  the  importation 
of  the  precious  metals. 

7.  It  comes  properly  enough,  under  the  head  of  capi- 
tal, to  very  fully  illustrate  the  boundaries  between  money 
in  its  character  of  a  tool,  used  to  measure  value  in  what- 
ever form  it  exists,  and  things  which  constitute  trading 
power  or  capital.  In  its  denominations  of  pounds,  shil- 
lings, pence,  or  dollars,  or  francs,  it  acts  as  the  scale  on 
the  yard,  or  other  measure  of  length  ;  while,  by  its  market 
value,  it  exchanges  for  every  thing  possessing  value. 
These  functions,  though  distinguishable  in  principle,  can 
no  more  be  separated  from  each  other  than  the  inches  or 
sub-divisions  of  the  yard-measure  can  be  separated  from 
the  stick  or  metal  on  which  they  are  inscribed.  We  use 
the  money-scale  to  measure  out  capital,  a  good  deal  as 
we  use  the  peck  or  bushel  measure  to  estimate  certain 
quantities  of  grain,  or  the  quintal,  when  we  buy  or  sell 
by  weight.  In  these  cases  we  only  need  as  many  yard- 
sticks, or  bushel  measures,  or  quintal  weights,  as  will 
serve  the  purpose.  We  do  not  invest  capital  in  a  large 
supply,  if  a  comparatively  small  number  will  serve  our 
purpose.  Just  so  is  it  with  money  :  people  will  only  buy 
as  much  of  it  as  is  needed  to  be  used  in  its  trading 
capacity  to  make  small  purchases,  pay  for  labor,  and  give 
change.     As  a  measure  its  presence  is  not  needed.     This 


28  CURRENCY. 

is  equally  true  in  respect  to  paper  money.  Its  use  is 
mainly  limited  to  its  convenience,  and,  as  a  saving  to  the 
state,  to  the  extent  to  which  the  state  can  safely  use  the 
gold  it  has  received  in  payment  for  such  paper  money  as 
the  public  has  purchased.  This  question  will  be  very 
fully  discussed  when  I  come  to  consider  the  right  of  the 
state  to  be  the  only  issuer  of  such  money. 

8.  While  treating  generally  of  capital,  it  may  be  ob- 
served, that  in  wealthy  and  wealth-producing  countries, 
where  the  surplus  savings,  or  profits  of  industry  and 
invested  capital,  accumulate  rapidly,  and  tend  to  a  pleth- 
ora of  trading  power  in  the  loan  markets,  it  is  most 
desirable  that  a  well-regulated  and  prudent  development 
of  private  and  public  enterprises  at  home  and  abroad 
should  be  fostered  and  encouraged,  —  not,  however,  by 
subsidies  or  bonuses,  but  by  wise  legislation,  giving  the 
utmost  freedom  of  action  and  protection  against  fraud. 
The  plethora  of  unemployed  capital  always  tends  to 
over-trading  and  speculation ;  and  these  lead  by  logical 
sequence  to  panics  and  crises,  so  destructive  to  industrial 
interests  and  capital.  To  prevent  the  accumulation  of 
too  much  floating  capital,  it  is  most  desirable  to  find 
profitable  fields  of  investment  of  the  more  permanent 
kinds. 

9.  Perhaps  the  future  development  and  perfecting  of 
a  wisely  conceived  plan  of  co-operative  associations  may 
lead  to  a  more  healthy  adjustment  of  demand  to  supply, 
of  capital  for  productive  permanent  undertakings,  and 
lead  to  a  more  smoothly  working  industrial  system.  This 
is  a  question  for  those  who  devote  themselves  to  social 
and  political  science,  as  well  as  the  political  economist, 
to  consider.  Society  now  seems  to  need  a  safety  valve, 
or,  more  properly  speaking,  a  governor,  to  do  for  it  what 
both  these  do  for  the  steam-engine  ;  namely,  to  regulate 
the  force  and  the  motion  of  the  machine.     For  this  pur- 


CAPITAL   AND    TRADING   POWER. 


29 


pose,  freedom  of  action  to  the  natural  laws  is  the  best 
thing.  At  present  the  origination  and  management  of  the 
joint-stock  companies,  which  mostly  absorb  the  surplus, 
or  unemployed  capital,  or  capital  that  pays  scarcely  any 
thing  to  the  owner,  is  left  largely  in  the  hands  of  pro- 
fessional jobbers,  who  are  too  often  hardly  better  than 
common  swindlers.  People  do  not,  and  perhaps  cannot, 
exercise  ordinary  prudence  in  investigating  for  themselves 
the  numerous  schemes  presented  for  the  purpose  of  ex- 
tracting large  profits  and  commissions,  rather  than  foster- 
ing sound  commercial  undertakings.  Government  has, 
to  some  extent,  assumed  the  right  to  exercise,  through 
special  officials,  a  supervision  over  banks,  insurance  and 
railway  companies  at  home.  Possibly  such  supervision 
might  be  extended  to  foreign  investments  so  far  as  to  see 
that  fraudulent  practices  shall  not  be  perpetrated  with 
impunity.  "  Prevention  is  better  than  cure  "  where  it 
can  be  exercised  without  infringing  the  utmost  lawful 
freedom  of  action  on  the  part  of  the  citizen.  Where  a 
clear  and  evident  intent  to  commit  a  fraud  is  unearthed, 
the  state  may  surely  exercise  its  power  to  prevent  it, 
instead  of  waiting  for  the  commission  of  the  act,  and 
then  proceeding  to  punish  the  offender,  who  too  often 
"goes  unwhipped  of  justice." 

10.  Another  of  the  evils  of  modern  society,  which  ex- 
isted also  in  ancient  times,  and  especially  in  ancient 
Rome,  is  the  tendency  of  capital  to  accumulate  in  a 
comparatively  few  hands  or  families.  This,  too,  is  a 
question  well  worthy  the  careful  consideration  of  con- 
servative men  and  social-science  reformers.  This  ten- 
dency is  the  chief  instigation  to  the  other  extreme  of 
communism,  which  seeks  the  overthrow  of  society  in 
order  to  revel  in  the  wreck  of  wealth  and  the  accumu- 
lation of  past  industrial  savings.  Great  accumulations  of 
wealth  and  capital  on  the  one  hand,  and  extreme  pov- 


30  CURRENCY. 

erty  and  deficient  employment  on  the  other  hand,  are  the 
predominating  evils  in  the  chief  industrial  countries  of 
the  modern  world,  as  much  or  more  than  they  were  of 
ancient  times. 

ii.  The  application  of  labor  to  the  production  of  the 
necessaries  and  luxuries  of  life,  unaided  by  capital,  is 
only  to  be  found  in  the  rudest  condition  of  society.  The 
happy  medium,  it  would  seem,  should  be  when  skilled 
labor,  aided  by  capital  invested  in  houses,  factories,  farms, 
steamships,  railways,  and  all  the  numerous  appliances  of 
modern  inventions,  is  directed  by  experience  and  ability. 
There  are  no  natural  reasons  for  a  conflict  between  capi- 
tal and  labor.  They  should  always  act  like  reciprocating 
engines  on  each  other ;  and  it  is  the  main  intent  of  the 
science  of  political  economy,  or  of  industry,  as  I  have 
suggested  as  a  more  appropriate  and  expressive  term,  to 
differentiate  and  clearly  develop  the  true  methods  of 
applying  these  forces  to  the  advantage  of  society.  Ben- 
tham's  proposition  of  "  the  greatest  good  to  the  greatest 
number"  falls  short  of  expressing  what  economic  sci- 
ence should  aim  to  accomplish.  That  science  should 
aim  to  perfect  an  industrial  system  that  shall  provide 
employment,  and  the  means  of  comfortable  subsistence 
and  homes,  for  each  and  all  the  members  of  society.  All 
legislation  designed  to  foster  monopolies,  whatever  the 
pretext,  is  an  assault  on  the  rights  of  labor,  and  cer- 
tainly, in  the  end,  tends  to  make  "  the  rich  richer,  and 
the  poor  poorer."  The  protective  legislation  of  the 
United  States  has  caused  the  most  wide-spread  distress 
amongst  the  industrial  and  laboring  classes.  The  Na- 
tional and  the  States'  Governments  have  long  been  sub- 
ject to  the  corrupting  influences  of  great  capitalists,  who 
seek  to  control  all  the  avenues  to  industrial  independ- 
ence. Hence  we  see  the  cloven  foot  of  communism 
treading  like  a  spectre  in  Ihe  rich  man's  tracks.     Such 


CAPITAL   AND   TRADING    POWER.  31 

a  condition  of  things  calls  for  careful  investigation  on  the 
part  of  those  who  are  tracing  causes  from  effects. 

12.  But  to  proceed  with  the  consideration  of  the  prin- 
ciples and  functions  of  capital.  I  have  shown  how 
money  measures  value,  and  how  it  metes  out  capital  in 
the  loan  market.  To  instance,  we  speak  of  ten,  a  hun- 
dred, or  a  thousand  pounds  or  dollars,  as  of  so  much 
money ;  when,  in  truth,  it  is  only  capital  we  wish  to 
designate,  and  to  transfer  from  buyer  to  seller,  or  from 
debtor  to  creditor.  But  the  sum  specified  in  the  check, 
or  carried  to  the  credit  of  the  borrower,  actually  repre- 
sents, and  is  an  equivalent  in  value  to,  so  much  gold  or 
currency.  It  is  a  substantial,  not  a  mythical  value.  It 
must  also  be  kept  in  mind  that  things  possessing  market 
value  can  only  be  properly  measured  by  such  things  as 
possess  similar  value. 

13.  It  will  now  be  seen,  by  what  has  been  said  respect- 
ing money  and  capital,  or  trading  power,  that  the  business 
of  a  banker  is  trading  in  loans  of  such  capital,  or  trading 
power,  which,  to  a  very  large  extent,  he  has  been  instru- 
mental, not  exactly  in  creating,  but  in  evolving  out  of 
goods  in  course  of  production  and  distribution.  The 
effect  of  this  wonderful  method  of  utilizing  the  trading 
power  of  goods  has  given  rise,  during  the  last  three-quar- 
ters of  a  century,  to  enormous  creation  of  wealth  and 
commercial  energy  and  activity.  Without  such  aid,  the 
vast  system  of  railways  now  existing  in  the  chief  com- 
mercial and  industrial  countries,  and  the  numerous  steam 
and  other  ships  traversing  every  sea,  lake  and  navigable 
river,  and  supported  by  the  carriage  of  goods,  which,  in 
turn,  they  help  to  produce,  could  not  have  been  brought 
into  existence  at  all,  or,  at  least,  not  for  centuries  to  come 
(postulate  64). 

14.  Professor  Bonamy  Price,  who  has  done  so  much  to 
clear  up  the  question  of  banking  and  what  a  banker  does, 


32  CURRENCY. 

has  shown  that  he  is,  in  effect,  only  a  broker  between 
producers  and  consumers,  or  dealers  in  goods.  The 
banker  takes  from  the  hands  of  a  seller  of  an  invoice  of 
goods  the  bill  of  exchange  which  he  (the  seller)  has  ac- 
cepted in  payment,  and  puts  it  in  his  drawer ;  and,  "  presto 
change,"  it  becomes  equal  to  its  face  in  gold,  less  a  small 
charge  for  interest,  which  he  deducts  or  "  discounts  "  for 
his  profit.  He  thus  becomes  the  broker  between  the 
buyer  and  seller.  When  a  banker  in  one  country  draws 
on  a  banker  in  another  country,  the  same  result  has  been 
effected.  The  banker  in  one  country  represents  or  acts 
as  broker  for  a  seller  ;  and  in  the  other  country  the  drawee, 
banker,  or  merchant,  as  the  case  may  be,  becomes  the 
broker  of  the  buyer  or  consumer.  This  is  legitimate 
banking,  with  which  the  issue  of  paper  money  has  nothing 
whatever  to  do,  and  hence  forms  no  part  of  sound 
legitimate  banking.  Professor  Price  is  right  when  he 
analyzes  the  business  of  a  banker,  ancl  finds  him  to  be  a 
broker. 

15.  But  for  the  quickening  power  of  banking  and 
bankers,  by  far  the  greater  part  of  the  capital  now  in 
active  circulation  would  remain  dormant.  Goods  could 
not  furnish  the  means  for  their  reproduction  and  distri- 
bution, as  they  now  do,  or,  at  most,  to  a  very  small 
extent.  The  power-loom  and  spinning-jenny,  the  forge, 
the  anvil,  and  the  numerous  great  labor-saving  inventions, 
would  have  been  deprived  of  a  large  proportion  of  their 
producing  powers,  without  the  aid  of  the  banker.  His 
magic  touch  turns  the  products  of  these  auxiliaries  to 
labor  into  trading  power,  more  efficacious  and  far  less 
costly  than  gold. 

16.  Those  who  will  take  the  trouble,  and  have  the 
capacity,  to  master  these  important  truths,  will  see  how 
absurd  the  cry  for  "  more  money "  is,  when  it  is  not 
money  at  all  that  propels  the  great  and  complex  indus- 


VALUE.  33 

trial  system,  except  in  so  limited  a  degree  as  to  be  almost 
inappreciable  in  the  vast  ocean  of  trading  power,  or 
capital.  I  shall  go  on,  step  by  step,  to  apply  these  fun- 
damental principles,  and  to  show  wherein  the  monetary 
system  of  the  world  fails  to  meet  their  requirements, 
especially  in  the  matter  of  banks  of  issue,  and  in  particu- 
lar the  Bank  of  England,  and  National  Banks  of  America. 


CHAPTER   IV. 

VALUE. 


i.  No  term  used  by  economic  writers  has  given  rise 
to  more  confusion  and  bad  logic  than  that  of  value.  "  In- 
trinsic "  value  and  market  value  are  continually  con- 
founded with  each  other.  I  have  pointed  out  the  dis- 
tinction between  the  two  terms  in  the  introduction.  It  is 
with  market  value  we  have  to  deal  in  monetary  science ; 
and  I  always  speak  of  it  as  "  market  value,"  so  that  no 
one  can  accuse  me  of  using  them  "indiscriminately." 
Then,  we  have  the  contention  about  "the  measure  of 
value,"  and  "common  measure  of  value,"  which  will  be 
attended  to  in  due  time.  But  the  great  controversies 
relate  to  what  regulates  market  value.  Ricardo,  follow- 
ing Adam  Smith  and  others,  says,  — 

"  It  is  the  cost  of  production  that  must  ultimately  reg- 
ulate the  price  of  commodities,  and  not,  as  has  often 
been  said,  the  proportion  between  supply  and  demand." 

2.  A  little  farther  on  he  says,  "  supply  and  demand 
may  for  a  time  affect  the  market  value  of  a  commodity." 
Then,  there  is  another  school  who  assert  that  demand 
alone  sets  the  market  value  of  commodities.  But  I  shall 
cite  a  passage  from  John  Stuart  Mill,  to  show  the  im- 
portance of  the  term,  and  likewise  the  desirability  of  hav- 
ing a  demonstrated  scientific  definition  of  it. 


34  CURRENCY. 

3.  Mr.  Mill  devotes  several  chapters  to  the  subject; 
and  in  his  opening  one  he  says,  — 

"  The  subject  on  which  we  are  about  to  enter  fills  so 
important  and  conspicuous  a  position  in  Political  Econ- 
omy, that,  in  the  apprehension  of  many  thinkers,  its 
boundaries  confound  themselves  with  the  science  itself." 
He  further  observes,  that  some  eminent  economists  have 
even  proposed  "  to  call  political  economy  the  science  of 
values."  I  would  suggest  "  the  science  of  industry  "  as 
more  appropriate  and  comprehensive  for  the  larger  study, 
and  "  science  of  values"  as  quite  expressive  of  the  scope 
of  what  is  usually  termed  "  monetary  science." 

4.  It  would  occupy  by  far  too  much  space  to  attempt 
to  cite  the  arguments  of  numerous  writers,  who  stand 
nearly  equally  divided  in  numbers  between  the  two  prop- 
ositions stated  by  Mr.  Ricardo.  It  seems  to  me  that 
those  who  claim  that  the  market  value  of  commodities  is 
regulated  alone  by  the  quantity  or  cost  of  the  labor 
expended  in  their  production,  are  met  at  the  very  thresh- 
old of  their  argument  by  an  unanswerable  rebuttal  of  the 
claim.  Labor  itself  must  be  admitted  to  be  strictly  un- 
der subordination  to  supply  and  demand.  But,  not  to 
anticipate  my  argument,  I  will  only  here  say,  that  it  would 
be  absurd  to  argue  that  the  productions  of  labor  should 
be  excluded  from  the  ruling  principles  of  labor.  If  the 
market  value  of  labor  is  regulated  by  supply  and  demand, 
the  productions  of  labor  necessarily  are.  The  product 
must  be  governed  by  the  same  principles  as  those  which 
govern  the  labor  of  the  producer.  Then,  there  are  numer- 
ous auxiliaries  to  production,  such  as  capital,  skill,  and 
machinery,  to  be  taken  into  the  account,  which,  equally 
with  mere  manual  labor,  are  admitted  on  all  hands  to  be 
governed  by  supply  and  demand.  It  must  be  also  ad- 
mitted, that  labor,  capital,  skill,  and  machinery  cannot  set 
a  market  value  for  themselves. 


VALUE.  35 

5.  I  use  "market  value  "  as  the  average  price  at  which 
goods  are  sold  in  an  open  market  at  any  particular  time, 
and  price  as  the  incident  of  a  single  bargain  resulting  in 
a  sale.  Adam  Smith  and  most  other  great  authorities 
speak  of  "  exchange  value,"  or,  as  the  former  has  it,  "ex- 
changeable value,"  which  latter  term  Mr.  Mill  discards 
as  "  ungramraatical."  I  prefer  the  term  "  market  value." 
I  will  now  let  Mr.  J.  15.  McCulloch  state  the  case  for 
those  who  assert  that  the  cost  of  production  in  labor  and 
capital  alone  regulates  market  value. 

"In  so  far,"  he  observes,  "as  the  cost  of  commodities 
is  concerned,  it  is  plain  it  cannot  be  affected  by  the 
fluctuations  in  the  rate  of  wages  or  in  the  rate  of  profit. 
The  cost  of  commodities  depends  wholly  on  the  quantity 
of  labor,  or  the  sweat  and  toil  required  for  their  pro- 
duction. But  a  variation  in  the  rate  of  wages  is  not  a 
variation  in  the  quantity  of  labor,  but  merely  a  variation 
in  the  price  paid  for  that  labor."  It  is  quite  true  that 
the  wages  of  labor,  or  the  market  value  of  the  products 
of  labor,  do  not  increase  or  diminish  the  amount  or 
quantity  of  labor  required  to  produce  an  article.  But 
we  are  not  dealing  with  the  quantity  of  labor,  but  the 
market  value  and  the  products  of  labor.  No  one  denies 
that  volume,  or  supply  and  demand,  sets  the  market 
value  of  capital ;  and  yet  capital  is  only  the  savings  of 
labor,  or  labor  and  capital  together;  and  capital  con- 
tributes as  much  to  the  cost  of  an  article  as  labor  itself. 
Mr.  McCulloch  evidently  misconceives  the  question,  and 
confounds  quantity  of  labor  with  cost  of  labor,  or  its 
market  value. 

6.  Mr.  Henry  Dunning  McLeod  is  a  good  representa- 
tive of  the  opposite  equally  unsupported  theory.  He 
asserts  dogmatically,  — 

"  It  is  demand  or  consumption,  and  not  labor,  that 
gives  value  to  production."     Neither  of  these  proposi- 


36  CURRENCY. 

tions,  taken  by  itself,  is  true ;  and  yet  neither  is  wholly 
untrue,  or  capable  of  accounting  for  the  phenomenon  of 
market  value.  Without  stopping  to  inquire  minutely  into 
actual  first  causes  which  underlie  production  and  con- 
sumption, I  will  proceed  to  lay  down  the  principles 
which  govern  the  market  value  of  lands,  labor,  and  all 
things  having  such  value. 

7.  Divesting  our  minds  of  all  extraneous  and  con- 
fusing ideas,  and  discarding  from  view  what  is  called 
intrinsic  value,  let  us  think  only  of  market  value.  Thus 
approaching  the  subject,  the  following  formula  will,  I 
hope,  help  us  to  reach  a  satisfactory  result,  and  clear 
away  the  confusion  of  ideas  surrounding  it  in  the  writings 
of  nearly  all  accepted  authorities  on  political  economy. 
"  Market  value  is  determined  and  governed  by  the  com- 
petition amongst  producers,  aided  by  skill,  capital,  and 
machinery  on  the  one  hand,  and  competition  amongst 
buyers  for  consumption  on  the  other  hand."  In  other 
words,  "  Market  value  is  not  established  by  cost  of  labor 
in  production  alone,  or  by  demand  for  consumption 
alone,  but  is  the  resultant  of  the  two  forces,  —  competi- 
tion in  the  labor  market,  and  competition  amongst  buyers 
in  the  goods  and  other  markets.  The  former  stimulates 
production  and  the  latter  consumption ;  and  each  con- 
tinually acts  on  the  other,  like  reciprocating  engines." 
The  parts  played  in  production,  by  skill,  capital,  and 
machinery,  taken  into  the  account  with  the  means  of 
distribution  of  the  products  of  labor  and  the  methods 
of  consumption,  are  complex  questions  ;  and  their  analy- 
sis belongs  to  the  larger  science  of  industry,  or  political 
economy  {vide  postulate  65). 

8.  The  truth  of  this  postulate  seems  self-evident,  as 
it  is  fundamental ;  and  its  correctness  will  force  itself  on 
the  mind,  and  lead  to  conviction,  if  we  pursue  the  inves- 
tigation into  all  the  considerations  to  which  deductive 


VALUE. 


37 


and  inductive  reasoning  and  analysis  may  lead.  There 
are  always  two  sides  to  a  bargain  and  sale,  or  a  purchase, 
—  put  it  either  way.  The  very  term  "market"  implies 
this.  One  of  these  represents  supply,  and  the  other 
demand.     The  aggregation  of  bargains,  resulting  in 

SALES     OR     PURCHASES,     AT     STIPULATED     PRICES,     SETS     THE 

market  value  of  any  given  thing,  whether  it  be  labor, 
land,  a  commodity,  or  any  of  the  long  list  of  articles 
dealt  in  in  the  various  markets.  Though  buying  and 
selling  are  proximate  causes,  or  the  results  of  more  re- 
mote causes,  they  convey  to  the  mind  the  conviction 
of  the  truth  of  the  principles  which  give  and  regulate 
market  value.  The  primary  or  more  remote  causes  must 
be  sought  in  competition,  or  motives  for  competition, 
among  those  who  produce,  on  the  one  hand,  and  those 
who  consume,  on  the  other.  The  necessities,  tastes,  and 
passions  of  men  underlie  both  classes,  and  stimulate  to 
action. 

9.  The  consideration  of  the  forces  supply  and  demand 
leads  irresistibly  to  the  conclusion  that  they  are  equally 
concerned  in  producing  the  result  which  we  are  consid- 
ering, namely,  market  value.  In  respect  to  consumption, 
we  must  not  confine  its  meaning  to  actual  destruction, 
or  annihilation,  to  which  by  far  the  greater  part  of  the 
products  of  labor  are  destined,  but  extend  it  and  its 
effects  to  the  witlidraival  of  things  purchased,  from  com- 
petition in  the  markets.  When  we  reach  the  point  where 
we  find  that  competition,  which  is  the  result  of  numbers, 
whose  ambitious  tastes  and  desires  prompt  them  to  action, 
we  shall  be  carried  back  to  original  and  first  principles. 

10.  Production  emanates  from  the  necessity  which 
impels  men  to  labor,  as  well  as  the  desire  to  acquire 
property  and  wealth  ;  and  supply  is  the  result.  Con- 
sumption also  emanates  from  similar  motives.  Hence 
we  have  the  expression  of  an  equation  of  forces,  termed 


oobldb 


38  CURRENCY. 

in  economic  science  "the  law  of  supply  and  demand," 
which  I  have  before  said  is  a  proximate,  or  secondary, 
rather  than  a  primary  cause.  Perhaps  it  would  be  more 
correct  to  say  that  the  law  itself,  as  so  expressed,  is  in 
fact  the  last  link  in  a  chain  of  more  remote  causes,  end- 
ing in  the  accurate  adjustment  of  the  market  value  of 
every  thing  having  such  value.  Another  and  very  ex- 
pressive way  of  defining  and  postulating  the  effect  of  the 
law  of  supply  and  demand  would  be  to  designate  it  as 
"the  natural  law  of  adjustment  of  values."  There  is  a 
perpetual  struggle  going  on  between  the  producers  and 
consumers  of  commodities ;  and  the  general  markets 
may  be  regarded  as  an  immense  automatic  machine, 
or  system,  forever  at  work  adjusting  the  market  value 
of  goods,  and  establishing  the  ratio  between  production 
and  consumption,  and  distributing  labor  and  its  products 
(postulate  40). 

11.  Though  the  proposition  stated  by  Adam  Smith, 
that  "the  quantity  of  labor  expended  in  production  is 
the  ultimate  regulator  of  exchange  value,"  has  been 
accepted  by  the  greater  part  of  economic  writers,  there 
seems  no  more  reason  for  accepting  it  as  a  fundamental 
truth  than  there  is  for  accepting  the  opposite  theory  of 
McLeod,  that  "  demand  alone  "  produces  the  phenom- 
enon in  question.  I  might  leave  the  solution  of  the  ques- 
tion to  stand  on  the  ground  I  have  reasoned  out,  but  for 
the  very  dogmatic  assumption  of  both  parties,  who  have, 
as  before  remarked,  really  "jumped  to  a  conclusion" 
by  simply  begging  the  question.  Mr.  McCulloch,  after 
citing  Adam  Smith's  doctrine,  quotes  M.  Gamier,  a 
French  economist,  in  favor  of  its  truth,  and  then  pro- 
ceeds to  frame  a  sort  of  algebraical  formula,  to  show  that 
production  is  the  only  force  that  sets  market  value,  as 
follows  :  "  Suppose  that  the  commodities  A,  B,  and  C 
exchange  for  each  other.     If  A  suddenly  rise  in  value,  as 


VALUE.  39 

compared  with  the  others,  the  presumption  might  be, 
supposing  that  we  were  ignorant  of  the  circumstance, 
that  something  had  occurred  to  increase  the  demand  for 
A,  or  to  lessen  the  supply  of  both.  But  these  are  tem- 
porary and  accidental  causes  of  variation.,  and  must,  for 
the  reasons  stated  above,  speedily  disappear.  And  hence, 
if  A  continued  to  maintain  its  increased  value,  as  com- 
pared with  B,  C,  etc.,  it  would  be  a  conclusive  proof, 
either  that  the  quantity  of  labor  required  for  its  pro- 
duction had  been  increased,  or  that  the  quantity  required 
for  the  production  of  the  others  had  been  diminished." 
The  inference  he  then  draws  is,  that  "  it  is  labor,  there- 
fore, that  is  the  true  and  only  measure  of  the  cost,  or, 
as  it  has  sometimes  been  termed,  the  real  value,  of  all 
things.  .  .  .  Their  exchangeable  value  and  cost  arc  iden- 
tical." 

12.  This  method  of  reasoning,  it  seems  to  me,  proves 
nothing.  It  is  merely  setting  up  a  man  of  straw  in  order 
to  knock  him  down  again.  If  we  consider  how  many 
forces,  which  are  neither  "temporary  nor  accidental,"  are 
being  brought  to  bear  on  production  and  consumption, 
in  order  to  diminish  or  increase  prices,  or  market  value, 
we  shall  see  how  worthless  all  such  illustrations  are. 
Some  of  these  may  be  mentioned,  —  such  as  new  inven- 
tions for  diminishing  labor ;  improved  processes  of  pro- 
duction and  manufacture  ;  new  markets  ;  cheapening  of 
transport ;  discoveries  of  mines  ;  and,  finally,  changes  of 
fashions  and  tastes.  These  are,  more  or  less,  continu- 
ing influences  on  supply  and  demand,  which  perpetually 
tends  to  equilibrium  in  its  action  on  values. 

13.  Mr.  McCulloch,  as  if  distrusting  his  own  alge- 
braical formula,  next  quotes  a  very  misty  illustration, 
formulated  by  Adam  Smith,  who  says,  "The  real  price 
of  every  thing,  —  what  every  thing  really  costs  to  the  man 
who  wants  to  acquire  it,  —  is  the  toil  and  trouble  of 


40  CURRENCY. 

acquiring  it.  What  every  thing  is  worth  to  the  man  who 
has  acquired  it,  and  wants  to  dispose  of  it,  or  exchange 
it  for  something  else,  is  the  toil  and  trouble  which  it  can 
impose  on  other  people."  There  seems  to  me  to  be 
some  confusion  of  thought  in  this  passage,  such  as  is 
not  often  met  with  in  the  great  work,  "  The  Wealth  of 
Nations."  To  talk  of  the  "price,"  or  "cost,"  of  a  thing 
to  the  man  who  only  "  wants  to  acquire  it,"  is,  by  itself, 
devoid  of  meaning ;  and  the  next  sentence  is  scarcely 
less  obscure.  The  most  intelligible  explanation  of  these 
sentences  seems  to  be  (construing  them  in  conformity 
with  the  doctrine  set  up),  that  the  worth,  or  value,  of  a 
thing,  to  him  who  owns  or  has  acquired  it,  is  measured 
by  the  "  toil  and  labor  "  he  would  have  been  compelled 
to  expend  in  producing  the  article  he  desires  to  ex- 
change it  for,  if  he  had  himself  to  produce  or  manufac- 
ture it,  but  which  he  is  now  able  to  impose  on  another. 
Suppose  the  thing  he  owns  be  a  horse,  which  he  desires 
to  sell,  or  exchange  for  a  carriage  :  the  horse  is  worth 
to  him  "  the  toil  and  trouble  "  it  would  occasion  him  to 
construct  the  carriage  himself,  but  which  the  ownership 
of  the  horse  enables  him  "  to  impose  on  other  people." 
But  how  this  proposition  proves  that  the  cost  of  rearing 
the  horse  or  constructing  the  carriage  sets  the  exchange 
or  market  value  of  either,  is  by  no  means  made  clear  by 
any  interpretation  that  can  be  given  to  the  language  in 
question. 

14.  The  contest  between  the  two  classes  of  disputants 
over  these  mere  dogmas  is  well  exemplified  by  the  fable 
of  the  two  knights  who  met  on  opposite  sides  of  the 
shield  which  they  found  placed  in  the  highway,  and 
quarrelled  and  fought  about  the  metal,  and  devices  in- 
scribed thereon,  because  they  had  both  neglected  to 
examine  the  opposite  side,  —  a  step  that  would  have 
disclosed  to  each  the  important  fact  that  he  had  been  in 
possession  of  only  half  the  truth. 


VALUE.  41 

15.  The  late  Professor  Cairnes,  in  his  work  on  political 
economy,  seems  to  have  had  very  misty  ideas  on  the 
question  of  value,  and  especially  as  to  the  law  of  supply 
and  demand.  He  treats  the  two  sides  of  the  equation 
as  being  one  and  the  same  thing.  He  argues  that  the 
supplier  of  goods  is  at  the  same  time  a  demander  of 
money  or  something  else.  Hence  he  argues  that  the 
terms  are  convertible.  This  is  what  may  be  called  "  rea- 
soning round  a  circle,"  and  is  an  exhibition  of  the  fatuity 
of  even  learned  professors  of  universities,  when  they 
feel  it  incumbent  on  their  official  positions  to  attempt  to 
say  something  new,  and  to  publish  treatises  on  a  science 
they  have  never  mastered,  but  which  they  have  under- 
taken to  teach  to  others.  The  late  professor's  method 
of  proving  his  new  doctrine  is  exactly  on  a  par  with  the 
logic  of  the  Oxford  student  who  successfully  demonstrated 
to  his  proctor  that  they  were  really  standing  on  "the 
other  side  of  the  river."  Pointing  to  the  opposite  side 
of  the  stream,  he  desired  the  proctor  to  admit  that  that 
was  "  one  side  the  river,"  which,  being  done,  the  stu- 
dent triumphantly  cried  out,  "  I  have  you  now ;  for  you 
must  admit  that  this  is  the  '  other  side,'  Quod  erat 
demonstrandum . ' ' 

16.  Nothing  so  clearly  demonstrates  the  desirability 
of  a  standard  work  on  political  economy,  that  shall  con- 
tain all  the  established  principles  of  the  science,  as  the 
circumstance  that  the  world  is  being  flooded  with  crude 
theories  published  by  professors  who  feel  bound  to  rush 
into  print,  and  engage  public  attention.  The  whole  sub- 
ject should  be  condensed  into  a  moderate-sized  volume 
suited  to  colleges  and  schools.  Whoever  undertakes  the 
task  should  keep  in  view  the  desirability  of  writing  intel- 
ligibly and  for  popular  instruction,  and  of  having  clearly 
defined  meanings  attached  to  terms  in  common  use. 


42  CURRENCY. 


CHAPTER  V. 

HOW    THE  VALUE    OF   MONEY    IS    SET    AND    REGULATED,    AND 
HOW  IT   DIFFERENTIATES   OTHER  VALUES. 

i.  Money,  being  a  commodity,  has  its  market  value, 
without  reference  to  the  material  it  is  made  of,  set  by 
supply  and  demand ;  or,  in  other  words,  by  the  increase 
or  diminution  of  its  volume.  When  it  is  made  of  a 
material  largely  used,  and  acted  on  by  this  natural  regu- 
lator, it  will  be  seen  the  raw  material  and  the  manu- 
factured article  will  continually  tend  to  differ  from  each 
other  in  their  market  values.  The  only  method,  there- 
fore, to  maintain  between  the  two  commodities,  money 
and  bullion,  a  close  equilibrium  of  market  values,  is  easy 
interconvertibility.  Metal  only  becomes  money  after  it 
has  undergone  the  process  of  coinage.  It  is,  conse- 
quently, necessary  to  reach  a  clear  perception  of  what  is 
effected  by  coinage.  The  first  result  is  the  division  of 
the  metal  into  convenient  pieces  for  handling  and  weigh- 
ing in  small  or  large  amounts.  The  next  is  the  legal 
vei  ification  of  weight  and  fineness.  But  a  main  element 
in  money  is,  that  it  is  made  by  law  legal  tender  for  debts. 

2.  With  regard  to  inconvertible  paper  money,  we  know 
by  ample  experience  that  its  market  value,  or  trading 
power,  can  be  maintained  on  an  equality  with  gold  or 
silver,  or  raised  above  their  value,  by  limitation  of  vol- 
ume, or  by  keeping  the  amount  in  circulation  below  the 
demands  of  the  people  for  currency.  But  experience 
has  also  amply  demonstrated  the  impossibility  of  artifi- 
cially regulating  supply  to  demand,  when  such  money  has 
been  forced  on  society  by  governments.  Hence  man- 
kind instinctively,  as  well  as  from  the  exercise  of  reason, 
have  chosen  one  or  both  of  the  precious  metals  for  coin- 


HOW   THE   VALUE   OF   MONEY   IS   REGULATED.  43 

ing  their  money.  Metal,  then,  becomes  the  regulator  of 
the  market  value  of  money,  through  easy  and  cheap  inter- 
convertibility. 

3.  There  is  nothing  in  gold  and  silver,  in  respect  to 
measuring  and  differentiating  the  market  value  of  com- 
modities peculiar  to  those  metals,  except  their  superior 
fitness  and  convenience  for  coinage  and  practical  use. 
These  considerations  most  clearly  show  the  unfitness  of 
mere  engraved  denominations  of  dollars  or  pounds,  for 
money,  as  proposed  by  a  large  nuiviber  of  American 
politicians  and  others  in  other  countries.  They  are  de- 
ficient in  the  great  principle  of  a  convenient  governor, 
as  needful  for  money  as  for  the  steam-engine.  Coin 
and  metal,  when  interconvertible  in  manner  before  stated, 
will  never  vary  in  market  value  more  than  enough  to 
afford  a  minimum  profit,  or  motive  of  some  kind  for  con- 
version. 

4.  The  market  value  of  money,  it  has  been  seen,  is 
governed,  ist,  by  the  quantity  of  metal  contained  in  the 
coin  as  specified  by  its  denominations ;  and,  2d,  by  the 
limitation  of  the  amount  of  all  of  the  various  denomina- 
tions of  such  coins  issued  and  made  legal  tender.  I 
have  shown,  that  if  such  amount  is  held  below  the  quan- 
tity of  coin,  or  money,  required  for  conducting  the  indus- 
tries of  the  people,  it  will  necessarily  rise  above  the 
market  value  of  the  metal ;  and,  if  such  coin  is  issued 
in  excess  of  such  demand,  the  excess  will  be  exported 
as  bullion,  and  the  supply  of  metal  for  coinage  will  be 
stopped,  and  an  equilibrium  of  values  will  ensue. 

5.  The  practice  already  very  generally  conforms  to 
principles.  Under  the  regulations  of  most  of  the  mints 
of  the  world,  the  nearest  approach  to  free  trade  has  been 
reached.  No  nation  now  attempts  to  "  protect  "  the  pro- 
duction, or  manufacture  into  money,  of  gold,  which  is 
now  substantially  the  measure  of  value  of  all  other  com- 


44  CURRENCY. 

modities,  labor,  etc.,  in  most  countries.  Hence  the 
owners  of  gold  can  everywhere  take  their  gold  bullion 
to  these  money  factories  and  exchange  it  for  its  mar- 
ket value  in  coin,  or  money,  less  a  small  charge,  or 
agio,  to  cover  the  cost  of  coinage  (Chap.  XXVI.,  on 
Seigniorage) . 

6.  In  the  working  of  the  mints  we  have  a  very  clear 
illustration  of  the  advantages  of  free  trade.  The  law  of 
supply  and  demand  rules  omnipotent,  and  without  let  or 
hinderance.  All  that  is  needed  to  approximate  a  per- 
fect self-regulating  monetary  system  is  to  make  it  uni- 
versal, and  include  the  issue  of  paper  money  (Chap. 
XXV.).  But,  as  such  a  system  may  be  far  in  the  future, 
we  must  consider  monetary  principles  from  our  present 
stand-point,  and  each  nation  as  a  unit,  looking  only  to 
present  exigencies. 

7.  When,  from  any  cause,  there  occurs  such  a  diminu- 
tion in  the  demand  for  money  as  to  leave  a  profit  to  the 
bullion  broker,  or  dealer,  to  resort  to  the  melting-pot,  he 
buys  up  the  coined  money  so  long  as  it  affords  him  a 
profit.  If,  on  the  other  hand,  there  arises  such  a  demand 
for  money  as  to  leave  a  profit  to  the  dealer  in  bullion, 
he  takes  his  ingots  to  the  mint,  and  has  them  coined,  or 
sells  them  for  money.  I  shall  hereafter,  in  Chap.  XI., 
point  out  more  specifically  the  scientific  distinction  be- 
tween bullion,  the  raw  material,  and  money,  the  manu- 
factured article. 

8.  Paper  money  issued  for  its  full  face  in  gold,  and 
the  coin  being  held  for  its  conversion  on  demand,  is 
governed  by  the  same  general  principles  as  the  metallic 
money  into  which  it  is  so  made  convertible ;  and,  as 
already  stated,  there  can  be  no  redundancy  of  such 
money,  as  all  issued  in  excess  of  the  public  demands  — 
which  will  seldom  occur  —  will  return  to  the  issuer  for 
conversion,  and  the  coin  will  be  exported. 


HOW   THE  VALUE   OF   MONEY   IS   REGULATED.  45 

9.  No  principles  of  monetary  science  are  better  estab- 
lished, or  more  demonstrably  proved  by  long  practical 
experience,  than  that  no  more  metallic  money  or  paper 
money  so  issued,  and  payable,  can  be  held  in  circulation 
than  is  actually  needed  for  industrial  purposes,  for  the 
simple  reason  that  capital  invested  in  money  lies  idle, 
and  earns  no  profit,  so  long  as  it  is  held  in  that  form. 
The  old  adage  that  "money  is  only  useful  for  what  it 
will  buy,  or  when  it  is  spent,"  holds  good  in  practice  as 
well  as  in  theory. 

i 10.  In  view  of  these  great  fundamental  truths,  how 
senseless  is  the  clamor  for  "  more  money."  With  nearly 
free  mintage,  there  will  always  be  an  adequate  supply 
of  money.  The  cry  for  more  capital,  or  trading  power, 
after  some  long-continuing  depression  in  the  industries 
of  a  country,  in  times  of  crises,  brought  on  by  over- 
trading and  speculation,  or  by  the  whole  people  "  making 
haste  to  get  rich,"  would  be  more  logical ;  because  such 
crises  stop  production,  and  thus  diminish  the  supply  of 
capital. 

11.  When  the  cry  is  for  more  of  an  inconvertible 
paper  currency,  instead  of  for  more  capital,  which  is 
only  created  by  the  production  of  goods  and  the  slow 
processes  of  industry,  it  is  simply  idiotic,  for  the  reason 
that  the  greater  the  volume  of  such  currency  put  in  cir- 
culation, the  less  becomes  its  trading  power,  or  market 
value.  It  adds  nothing  to  the  actual  capital  of  a  coun- 
try, but  only  creates  "  a  fool's  paradise  "  for  those  who 
fancy  they  are  growing  rich  because  their  houses,  lands, 
and  goods  are  measured  by  a  yardstick  of  only  half  the 
standard  length.  )  The  laboring  man  and  mechanic  are 
also  deluded  by  the  higher  prices  they  receive  for  their 
labor,  according  to  this  delusive  measure.  But  all  mer- 
chants, laborers,  farmers,  shortly  find  that  whatever  they 
each  and  all  have  to  buy  has  risen  in  equal  proportion 


46  CURRENCY. 

to  what  they  each  and  all  have  to  sell,  and  none  are  the 
richer  for  "  marking  up  their  goods." 

12.  The  market  value  of  an  irredeemable  legal-tender 
paper  currency  is  regulated  only  by  the  limitation  set  on 
its  issue.  Not  having  any  other  regulator,  it  is  not  pos- 
sible for  those  who  supply  it,  especially  where  the  power 
and  prerogative  of  the  State  have  been  delegated  to  sev- 
eral thousand  competing  banks,  greedy  of  making  profit 
in  haste,  to  regulate  its  volume  properly.  Hence  it  is 
deficient  in  the  main  end  and  purpose  of  money. 

13.  In  respect  to  the  effect  of  limitation  in  the  volume 
of  irredeemable  paper  money,  Mr.  J.  B.  McCulloch  has 
truly  remarked,  in  one  of  his  notes  to  the  "  Wealth  of 
Nations,"  which  will  be  again  referred  to,  that  such  cur- 
rency being  legal  tender,  taken  in  connection  with  the 
circumstance  that  "  the  people  must  have  a  circulating 
medium,"  will  always  make  its  market  value  depend  on 
the  limitation  set  on  the  quantity  emitted. 

14.  With  such  clear  and  well-defined  principles,  in  re- 
spect to  the  circumstances  which  govern  the  market  value 
of  an  irredeemable  paper  currency,  as  those  I  have  pos- 
tulated, and  more  fully  explained  in  this  and  Chap. 
XXIV.,  the  folly  and  ignorance  of  both  British  and  Amer- 
ican legislators,  in  "fixing  days  for  resumption,"  and 
"making  preparation,"  will  become  manifest.  The  so- 
called  "Gresham  Law,"  that  "an  inferior  currency  will 
drive  a  superior  currency  out  of  circulation,"  requires 
this  slight  addition  :  "  such  inferior  currency  being  issued 
in  excess  of  the  demands  of  industry."  With  this  amend- 
ment, the  remedy  of  the  evil,  or  the  method  for  resuming 
specie  payments,  becomes  too  obvious  to  require  argu- 
ment. Take  back  the  excess  of  supply  over  demand, 
or  wait  till  the  growth  of  industry  shall  act  as  a  contrac- 
tion, by  increase  of  demand,  and  the  market  value  of 
the  outstanding  notes  will  come  up  to  par  of  gold,  and 


HOW   THE   VALUE   OF   MONEY   IS   REGULATED.  '  47 

gold  will  immediately  step  forward,  and  circulate  side  by 
side  with  the  paper,  and  resumption  becomes  an  estab- 
lished fact  by  a  perfectly  natural  process. 

15.  The  statesmen  of  France,  as  will  hereafter  be 
shown,  understood  this  law  better  than  those  of  Great 
Britain,  when  the  latter  refused  to  act  on  the  Bullion 
Report  of  Mr.  Homer  from  1810  to  1821,  or  those  of 
the  United  States  in  1S74,  when  they  passed  the  law  to 
provide  for  the  resumption  of  specie  payments,  which, 
while  it  requires  the  purchase  of  gold  in  immense  amounts 
by  sale  of  bonds  bearing  interest,  also  provides  for  the 
indefinite  increase  of  national  bank  notes.  This  so- 
called  "  Resumption  Act "  is  one  of  the  best  illustrations 
of  the  wisdom  of  the  words  addressed  by  the  Swedish 
Chancellor  Oxenstiern  to  his  son,  when  the  young  man 
was  about  to  visit  the  courts  of  Europe  :  "  Go,  my  son, 
and  see  with  how  little  wisdom  mankind  is  governed." 

16.  Science  and  experience  combine  to  show,  beyond 
controversy,  that  some  valuable  and  suitable  metal  like 
gold,  must  be  made  the  standard,  or  governor,  and  com- 
mon measure  of  value,  and  the  basis  of  any  monetary 
system  approximating  perfection ;  and  also  that  the 
money  fabricated  out  of  such  metal,  must  be  supplied 
by  the  nation  through  a  department  independent  alike 
of  national  or  other  financial  operations,  and  free,  or 
nearly  so,  of  cost  for  coinage.  Under  these  conditions 
the  public  will  always  supply  the  metal  in  exchange  for 
coin.  The  same  considerations  prove  that  such  a  depart- 
ment, having  no  discretion  of  its  own,  but  bound  to  act 
on  the  natural  law  of  supply  and  demand,  is  the  only 
safe  and  proper  issuer  of  paper  money,  which  must  be 
paid  for  by  banks,  as  it  now  is  by  the  people  at  large, 
for  its  full  face  value  in  gold;  thus  making  gold  and 
paper  money,  like  gold  and  bullion,  interconvertible  at 
the  pleasure  of  the  holders  thereof. 


48  CURRENCY. 

17.  In  the  matter  of  taxation  to  support  the  state,  and 
provide  for  the  administration  of  justice  and  the  educa- 
tion of  the  people,  each  individual  should  be  required 
to  contribute,  pro  rata,  according  to  his  means  or  in- 
come, from  whatever  source.  Beyond  this  necessary 
interference  with  natural  rights,  the  Legislature  should  not 
go.  The  value  of  labor,  of  lands  and  houses,  of  stocks, 
or  shares  in  public  and  private  companies,  of  all  the 
products  of  labor,  and  of  money,  metallic  and  paper, 
should  be  left  to  the  regulation  of  the  forces  embodied 
in  or  expressed  by  the  equation  of  supply  and  demand. 
The  observance  or  violation  of  the  laws  of  industry  and 
of  society,  which  rule  and  govern  men  in  their  social 
relations,  marks  the  distinction  between  right  and  wrong, 
good  and  evil.  Hence  it  is  the  duty  of  the  legislator, 
the  student  of  divinity,  of  law,  of  medicine,  and  the 
laborer  in  all  branches  of  industry,  to  search  out  and 
ascertain,  by  analysis  and  logical  reasoning,  what  are  the 
laws  of  nature  in  respect  to  society,  which  are  the  laws  of 
God,  and  are  superior  in  their  influences  and  tendencies 
to  those  of  man,  which  so  often  violate  and  contemn 
the  superior  organic  laws.  Let  all  such  remember  that 
mere  dogmatic  teaching  will  never  advance  the  cause  of 
truth  one  step. 

18.  "  Standard  of  value  "  and  "  measure  of  value  "  are 
expressions  which  have  distinctive  meanings,  though  con- 
tinually used  as  synonymous.  The  former  relates  to  the 
kind  and  fineness  of  the  metal  made  legal  tender  by 
the  state  ;  and  the  latter  to  the  scale  of  denominations, 
such  as  pounds  or  dollars,  stamped  on  the  coins.  The 
terms  also  apply,  in  like  manner,  to  other  corporeal 
things,  such  as  relate  to  capacity,  length,  and  weight. 
All  these  are  proper  subjects  for  legislative  determination. 
The  Legislature  only  makes  uniform  scales,  but  the  laws 
of  industry  determine  the  market  values  of  the  things 


NOMISMA,    OR    LEGAL   TENDER,    AND    BI-METALISM.         49 

measured.  It  is  thus  easy,  when  we  have  made  one 
thing,  namely,  gold,  a  common  measure  of  value,  to 
find  out  the  ratio  that  exists  at  any  time  between  the 
value  of  one  article,  or  class  of  articles,  and  another,  or 
other  articles  or  classes.  The  scale  of  denominations, 
indicating  the  quantity  and  fineness  of  metal  in  coined 
money,  is  both  a  "  common  measure  "  and  a  "  common 
denominator "  of  the  values  of  other  things.  We  use 
this  scale  very  much  as  we  use  the  scale  on  the  yard- 
stick to  parcel  off  so  much  cloth,  or  the  bushel  so  much 
grain.  Both  measures  are  indispensable,  —  the  one  to 
mark  value,  the  other  quantity.  When  we  have  ascer- 
tained the  value  of  a  given  amount  or  quantity  of  sev- 
eral articles,  by  the  common  measurer,  we  can  readily 
estimate  how  much  of  one  must  be  given  in  exchange 
for  such  given  quantity  of  any  other. 


CHAPTER  VI.1 

"NOMISMA,"    OR   LEGAL  TENDER,   AND   BI-METALISM. 

i.  The  theory  that  gold  and  silver  money,  or  coin,  by 
being  made  by  the  State  legal  tender,  and  both  supplied 
without  limitation  of  their  respective  volumes,  can  be 
made  to  circulate  on  the  same  level  of  value,  or  that  the 
market  or  actual  value  of  the  two  metals  can  be  main- 
tained in  equilibrium  by  law  of  parliament,  is,  on  the 
face  of  it,  an  absurdity.  Nevertheless,  this  theory  has 
found  innumerable  advocates  in  the  present  day.  Even 
some  leading  bankers  and  economists  in  France,  where 
its '  fallacy  has  been  demonstrated  in  practice  and  by 
unanswerable  logic,  have  lately  put  forth  vast  efforts  and 
written  volumes  to  maintain  its  practicability  as  well  as 

1  This  chapter  was  written  two  years  after  the  rest  of  the  work. 


50  CURRENCY. 

desirability;  and,  in  the  United  States,  the  two  Houses 
of  Congress  have  stultified  themselves  by  passing  a  law, 
over  the  President's  veto,  asserting  an  impossibility,  by 
providing  for  a  fixed  and  permanent  ratio  of  market 
value,  —  for  that  is  the  only  value  governing  money.  To 
cap  the  climax  of  absurdity,  the  law  made  it  obligatory 
on  the  President  to  invite  a  congress  of  nations  to  make 
the  same  universal,  —  the  better  to  override  the  great 
natural  law.  The  "  Silver  Congress  "  having  accordingly 
met  at  Paris,  it  was  found  that  none  of  the  delegates 
but  those  from  the  United  States  supported  the  absurd 
proposition ;  and  the  proceedings  will  ever  stand  as  a 
protest  against  the  renewal  of  the  proposition. 

2.  The  advocates  of  this  law  have  for  a  time  laid  aside 
the  agitation  in  favor  of  an  inconvertible  paper  currency, 
to  be  issued  in  such  quantities  as  "  to  meet  the  demands 
of  industry,"  in  order  to  pass  the  law  "  to  remonetize 
silver,"  by  declaring  that  a  dollar  containing  412^  grains 
of  silver  shall  pass  and  be  made  interchangeable  with  a 
gold  dollar,  worth  in  the  market  at  the  time  the  law 
passed  440,  and  now,  January,  1879,  460,  grains  of  silver. 
Nearly  all  the  speakers,  in  both  branches  of  Congress, 
in  favor  of  this  law  insisted  on  the  example  of  the  French 
currency,  as  affording  evidence  that  what  they  proposed 
was  correct  in  theory  and  sustained  by  practice.  But 
the  example  quoted  is  not  founded  in  fact.  France  has 
not  such  a  bi-metallic  coin  circulation  as  these  parties 
assert.  The  bi-metalism  of  France  is  a  very  different 
thing  from  the  bi-metalism  of  Congress.  The  theory  that 
inspired  the  authors  and  promoters  of  this  measure  is  to 
issue  an  overvalued  silver  dollar  in  order  to  make  a 
profit  to  the  nation  by  making  it  take  the  place  of  the 
lower  and  more  nearly  correctly  valued  gold  dollar.  This 
motive  was  avowed  by  nearly  all  the  speakers.  The  law 
as  passed  simply  proposes  that  the  nation  shall  purchase 


NOMISMA,    OR   LEGAL  TENDER,   AND   BI-METAUSM.        5 1 

silver  at  its  market  value,  and  then  (like  the  merchant 
who  conceived  the  idea  that  he  might  increase  his  wealth 
'•'by  marking  up  his  goods")  mark  up  the  price  of  the 
article  eight  or  ten  per  cent,  and  invites  the  owners  of 
gold  coin,  labor,  and  goods  to  accept  the  same  at  par, 
and  without  demur. 

3.  The  facts  in  relation  to  French  bi-metalism  are 
these  :  France  issues  no  bank  notes  of  a  lower  denomi- 
nation than  100  francs,  or  £,\  (say  $20),  and  no  gold 
coins  below  10  francs,  or  8s.  ($2),  and  hence  requires 
a  larger  amount  of  subsidiary  silver  coin  than  the  United 
States,  which  issues  all  the  one-dollar  notes  called  for 
by  supply  and  demand.  The  gold  circulation  and  re- 
serve in  France  may  be  set  down  at  ^250,000,000 
(say  $1,250,000,000),  as  estimated  by  Mr.  Ernst  Seyd, 
a  German  actuary  in  London,  and  ^50,000,000  (say 
$250,000,000)  of  subsidiary  silver  coins,  and  ^80,000,000 
of  Bank  of  France  notes. 

4.  Now,  the  French  Government  is  very  careful  never 
to  emit  any  larger  amount  of  silver  money  than  will  main- 
tain its  equilibrium  of  value  with  gold,  by  the  demand 
for  such  coins.  Seeing  the  tendency  of  silver  to  depre- 
ciate, during  the  very  time  the  silver  bill  was  undergoing 
discussion  in  Congress,  the  French  Government  promptly 
suspended  the  coinage  of  silver ;  and  the  effect  was  im- 
mediate. The  depreciation,  which  had  only  reached  the 
half  of  one  per  cent,  ceased ;  and  the  demand  for  it 
began  to  raise  its  value. 

5.  Concurrently  with  the  discussions  in  Congress,  the 
quantity  of  silver  coin  already  issued  under  former  Acts, 
and  in  circulation  in  the  United  States,  was  in  excess 
of  the  demand  for  it,  and  was  being  refused  by  the  banks 
on  ordinary  deposit  accounts  ;  and  such  coin  was  selling 
in  the  New  York  market  two  per  cent  below  greenbacks, 
or  legal-tender  treasury  notes,  which  were  one  and  a 


5  2  CURRENCY. 

half  to  two  per  cent  below  gold  par.  Nothing  short  of 
"a  craze  "  could  have  seized  on  a  majority  of  Congress, 
to  cause  them  to  totally  disregard  these  palpable  indi- 
cations of  the  action  of  the  natural  laws  of  industry. 

6.  The  same  thing  holds  good  in  relation  to  the  mone- 
tary systems  of  England  and  Germany  as  I  have  shown 
to  prevail  in  France.  England  and  Germany  are  both 
bi-metallic  countries.  Both  use  silver  as  "  token  money," 
or  for  subsidiary  coins ;  but  both,  like  France,  limit  the 
amounts  for  which  such  coins  are-  made  legal  tender,  as 
well  as  the  quantity  issued,  within  the  demand  for  such 
coin.  Only  the  present  United  States  Congress  is  stupid 
or  dishonest  enough  to  make  such  coin  unlimited  legal 
tender.  The  limitation  set  on  the  quantity  that  may  be 
issued  monthly,  by  the  new  law,  no  doubt  will  prevent  an 
immediate  considerable  depreciation. 

7.  It  is  not  to  be  doubted  that  two  standards  of  value 
may  be  created  by  law.  But  the  significant  question 
presents  itself,  Cut  bono  ?  What  good  will  result  from  it  ? 
It  involves  the  necessity  of  all  bargains  for  labor,  or  pay- 
ments for  goods,  etc.,  being  made  to  specify  whether  such 
payments  shall  be  exacted  in  gold  or  silver.  Such  a 
monetary  system  would  be  too  inconvenient  to  satisfy 
public  wants,  and  would  lead  to  perpetual  misunder- 
standings and  litigation.  People  would  always  seek  to 
pay  debts  in  the  over- valued  metal,  —  the  cheapest  money. 

8.  A  passage  in  the  politics  of  Aristotle,  the  greatest 
of  logicians,  has  been  seized  hold  of,  and  is  often  quoted, 
to  show  that  the  law  actually  creates  the  market  value 
of  money.  But  such  writers  simply  pervert  the  mean- 
ing of  the  great  ancient  Greek  philosopher.  He  says, 
"  Money  has  value  only  by  law,  and  not  by  nature." 
Again,  he  says,  "  In  virtue  of  a  voluntary  convention, 
money  has  become  the  medium  of  exchange.  We  say 
'nomisma'  (money),  because  it  is  not  so  by  nature,  but 


NOMISMA,    OR    LEGAL   TENDER,    AND    BI-METALISM.        53 

by  law,  '  nomos,'  and  because  it  is  in  our  power  to  change 
it,  and  render  it  useless."  The  meaning  of  these  pas- 
sages is  simply  that  the  law  of  the  Legislature  makes 
whatever  we  call  money  "  legal  tender  ;  "  and,  by  changing 
the  legal-tender  quality  to  something  else,  the  former 
money  loses  its  value  as  money.  Aristotle  never  asserted 
that  the  market  value  of  a  metal  used  as  money  was  the 
result  of  "law,"  other  than  the  natural  law.  I  have 
already  pointed  out  in  the  last  chapter  the  scientific  and 
practical  fact,  that  legal-tender  money  has  a  market  value 
of  its  own,  created  by  supply  and  demand  for  it,  as  money, 
distinct  from  that  of  the  material  out  of  which  it  is  made  ; 
and  this  "  value  "  is  caused  by  its  uses  as  a  tool  of  indus- 
try, and  is  most  clearly  what  the  Greek  philosopher 
meant.  "  The  law  "  only  gives  it  value  as  money,  not  as 
metal.  This  is  a  substantial  distinction.  I  beg  to  direct 
the  attention  of  M.  Cemuschi,  the  French  banker  and 
economist,  to  this  explanation  ;  as  it  is  to  him  I  am  in- 
debted for  these  and  other  valuable  quotations  from  high 
authorities  which  will  follow.  He  is,  I  think,  too  good 
a  reasoner  to  allow  his  judgment  to  be  warped  by  the 
mere  opinions  of  others,  which  he  evidently  has  miscon- 
ceived. 

9.  I  copy  the  following  admirable  explanation  of  the 
origin  and  principles  of  money  made  by  Justinian  from 
M.  Cemuschi's  "brochure"  on  Bi-Metalism,  issued  in 
America  to  influence  congressional  legislation  on  the 
silver  question. 

The  great  Roman  jurist  and  economist  says,  "The 
origin  of  buying  and  selling  began  with  exchange  (bar- 
ter) .  Formerly  money  was  unknown,  and  there  existed 
no  terms  to  differentiate  merchandise  and  price ;  but 
every  one,  according  to  the  wants  of  the  time,  and  cir- 
cumstances, exchanged  things  which  were  useful :  for  it 
happens  frequently  that  one  is  in  need  of  what  another 


54 


CURRENCY. 


has  in  excess.  But  as  it  seldom  coincided  that  what  one 
possessed  the  other  wanted,  and  conversely,  a  material 
was  '  elected,'  whose  legal  and  perpetual  value  remedied 
by  its  homogeneity  the  difficulties  of  barter.  This  mate- 
rial being  officially  (or,  as  Aristotle  would  have  said,  law- 
fully) coined,  circulates  and  holds  its  power,  not  so  much 
from  its  substance  as  its  quantity.  Since  then  each  of  the 
two  things  exchanged  is  no  longer  called  merchandise, 
but  only  one  ;  the  other  is  called  price."  I  have  shown 
that  money  in  fact  abolishes  exchange  altogether,  by 
being  a  common  measure  of  value,  which  value  is  set 
by  the  price  for  which  goods  are  bargained  for  in  the 
market  (postulate  6). 

10.  This  pithy  explanation  of  the  origin  and  function 
of  money  is  worth  all  the  long  and  ingenious  theses  that 
have  been  penned  by  speculative  writers  on  the  subject. 
Justinian  evidently  perceived  the  scientific  fact  that 
money  indicated  the  "  price  "  or  value  of  the  thing  given 
in  exchange.  In  other  words,  he  perceived  how  money 
measures  market  value,  just  as  a  yardstick  measures 
length  and  breadth,  not,  however,  by  mere  denomina- 
tions, but  by  the  actual  market  value  of  the  coin,  as  fully 
explained  in  last  chapter.  Hence  all  well-regulated  mon- 
etary systems  provide  an  adequate  supply  by  intercon- 
vertibility  of  the  metallic  money  used  as  a  standard  of 
value,  to  meet  all  demands  for  it  by  those  who  possess 
the  raw  material,  or  metal.  Locke  has  adopted  almost 
the  same  precise  ideas  respecting  the  origin  and  func- 
tions of  money,  as  shown  in  an  extract  from  his  writings 
heretofore  quoted,  when  he  says  that  "  Men  do  not  sell 
their  goods  for  mere  sounds,"  or  denominations,  but  for 
the  actual  metal  contained  in  the  coin,  or  for  some  mate- 
rial, substance,  or  trading  power  measured  by  such  coin, 
the  coin  and  the  metal  being  readily  interconvertible. 

ii.  I  wish  I  could  give  M.  Cemuschi  credit  for  equally 


NOMISMA,    OR   LEGAL  TENDER,    AND    BI-METALISM.        55 

clear  perceptions  as  those  he  has  enabled  me  to  cite.  He 
says,  "  all  gold  and  silver  produced  are  money  :  they  are 
dollars  coming  from  under  ground."  This  is  not  even 
metaphorically  true  ;  because  the  law,  or  "  common  con- 
sent," creates  the  denomination  called  "a  dollar,"  and 
authorizes  the  fabrication  of  the  coin,  and  gives  it  the 
finishing  stroke  by  making  it  legal  tender. 

12.  M.  Cemuschi  also  quotes  Newton,  and  evidently 
misconceives  his  meaning  when  he  applies  his  language 
to  support  his  theory,  that  money  is  nothing  but  the 
creation  of  the  state,  or  has  no  other  value  except  its 
legal  value.  Newton  says,  "  It  appears  from  experience, 
as  well  as  from  reason,  that  silver  flows  from  those  places 
where  its  value  (he  must  mean  legal  value)  is  lowest  in 
proportion  to  gold,  as  from  Spain  to  all  Europe,  and 
from  all  Europe  to  the  East  Indies,  China,  and  Japan ; 
and  that  gold  is  most  plentiful  in  those  places  in  which 
its  (legal)  value  is  highest  in  proportion  to  silver,  as  in 
Spain  and  England."  In  other  words,  the  overvalued 
metal  (overvalued  by  law)  drives  the  other  (rightly  or 
under  valued  metal)  to  countries  where  it  is  undervalued, 
or  where  its  value  is  set  by  the  natural  laws. 

13.  Newton  then  points  out  how  to  remedy  this  evil, 
which  is  to  make  the  legal  valuation  to  coincide  with  the 
natural  value  of  the  metals.  By  this  method,  however, 
only  a  temporary  equilibrium  of  value  can  be  established, 
because  of  the  influence  of  the  natural  laws,  which  con- 
tinually cause  the  ratio  of  the  market  value  between  the 
two  metals  to  vary  and  fluctuate,  just  as  in  the  case 
of  other  and  more  perishable  commodities,  —  silver  itself 
having  fluctuated  twenty-five  per  cent  in  half  a  dozen 
years. 

14.  But  why,  in  the  name  of  common  sense,  and 
monetary  and  industrial  science,  should  such  a  system 
be  adopted,  or,  where  it  exists,  be  continued,  when  the 


5  6  CURRENCY. 

simple  remedy  has  long  ago  been  found,  and  is  being 
carried  out  with  perfect  success  in  so  many  of  the  com- 
mercial countries  of  the  world?  That  remedy  consists 
in  making  gold  the  legal  measure  of  the  market  value 
of  silver  and  all  commodities,  labor,  lands,  etc.,  or,  in 
other  words,  making  the  legal  (or  coin)  and  the  natural 
value  of  gold  to  coincide  by  interconvertibility,  and 
using  silver  and  other  less  valuable  metals  to  supply  just 
enough  subsidiary  coins  to  meet  demand.  (The  best 
method  to  regulate  such  coins  will  be  found  in  Chap. 
XXIV.)  This  is  the  only  bi-metalism  admissible  by 
demonstrated  principles  of  science,  and  is  in  perfect 
accord  with  the  practical  experience  of  commercial 
nations. 

15.  The  new  law  of  Congress,  if  not  repealed,  cannot 
fail  to  produce  infinite  mischief.  In  the  first  place,  by 
seeking  to  pay  old  debts  with  a  depreciated  or  over- 
valued metal,  it  casts  an  ineffaceable  stigma  on  the  honor 
and  honesty  of  the  nation.  In  the  next  place,  if  the  law 
should  remain  on  the  statute-books  of  the  nation  for  a 
few  years,  the  overvalued  silver  will  do  exactly  what 
Newton  says  of  it :  it  will  drive  gold  out  of  circulation, 
and  the  United  States  will  have  a  currency  like  that  of 
India,  China,  and  Japan,  wholly  of  silver,  or  paper  con- 
vertible into  silver.  The  inconvenience  of  such  a  cur- 
rency, both  in  conducting  home  trade  and  industry,  and 
in  settlement  of  foreign  exchanges,  cannot  be  readily 
estimated.  Merchants  and  bankers,  as  well  as  exchange 
brokers,  will  have  to  keep  a  pair  of  horses  and  a  lock-up 
van  to  transport  their  metal  daily  from  their  counters  to 
places  of  deposit.  A  lady  going  a-shopping  with  five 
hundred  dollars  will  require  to  have  a  porter  or  a  foot- 
man to  carry  thirty  pounds  avoirdupois  weight  of  silver 
dollars  ;  or,  if  she  has  only  the  modest  sum  of  a  hundred 
dollars,  she  will  have  to  carry  the  weight  of  an  ordinary 


NOMISMA,    OR    LEGAL   TENDER,    AND    BI-METALISM.        57 

brick  in  this  inconvenient  metal.  Then,  again,  think  of 
the  unfortunate  traveller,  who  has  to  carry  more  or  less 
cash  with  him  !  What  is  he  to  do?  Mr.  McKay  should 
rewrite  his  book  on  popular  delusions,  in  order  to  chroni- 
cle and  do  justice  to  this  "  silver  craze."  It  will  certainly 
come  to  be  recorded  as  one  of  the  wildest  of  delusions. 

16.  We  shall,  no  doubt,  be  told  by  the  silver-men 
that  the  practical  inconvenience  of  a  silver  standard  and 
currency  will  be  averted  by  the  adoption  of  a  greenback 
or  legal-tender  national  paper  currency,  convertible  into 
the  new,  overvalued,  silver  coins.  But  this  would  only 
partially  meet  the  question  of  convenience,  and  not  at 
all  the  evils  of  a  metallic  standard  that  has  fluctuated 
twenty-five  per  cent  in  four  or  five  years.  Only  that 
long  ago  an  ounce  of  silver  was  worth  sixty-one  pence 
in  London.  In  less  than  three  years  it  fell  to  forty-seven 
pence  per  ounce,  and  has  since  then  oscillated  between 
those  figures  ;  which  shows  a  total  variation  in  price,  as 
measured  by  gold,  the  more  stable  metal,  of  over  twenty- 
five  per  cent.  This  is  much  worse  than  the  fluctuations 
in  greenbacks  during  the  last  five  years. 

17.  As  to  the  question  of  economy  in  adopting  a 
cheaper  metal,  that,  too,  is  a  delusion.  It  is  a  more 
costly  metal,  when  its  ratio  of  value  is  considered,  than 
gold.  It  takes  fifteen  times  (more  or  less)  the  quantity 
to  make  it  equivalent  in  value  to  gold,  and  fifteen  times 
the  cost  to  manufacture  to  transport  and  handle ;  and, 
of  course,  it  is  subject  to  fifteen  times  the  risk  and  wear 
and  tear  arising  from  use. 

18.  On  the  question  of  morality,  the  overvaluing  of 
silver  coin  is  exactly  on  a  par  with  the  alleged  practices 
of  the  Jews,  during  the  long  period  of  the  "  Middle 
Ages,"  of  "sweating,"  "clipping,"  and  -'filing  "  of  coins, 
for  profit,  and  that  of  many  despots,  who  issued  coins 
of  half  their  former  legal  weight,  and  compelled  their 


1,8  CURRENCY. 

subjects  to  accept  them  at  their  old  denominational 
weights.  This  infamy  now  stamps  every  man  who  voted 
for  the  silver  bill  in  the  American  Congress,  unless  he 
can  plead  ignorance. 

19.  M.  Cemuschi  is  a  representative  bi-metallist,  who 
argues  that  the  law  can  set  and  maintain  a  fixed  and 
unchangeable  ratio  between  the  two  precious  metals.  At 
pp.  27  and  28  of  his  published  evidence  before  the  Con- 
gressional Commission  on  the  silver  question,  issued  in 
1877,  under  the  title,  "  Nomisma,  or  Legal  Tender,"  he 
says,  "  if  the  relative  value  of  gold  and  silver  has  always 
been  determined  by  the  conflict  of  the  several  legisla- 
tions, how  can  we  deny,  that,  when  the  legislations  shall 
be  everywhere  and  forever  the  same,  the  relative  value 
of  the  metals  will  always  remain  the  same?"  He  then 
goes  on  to  show,  in  order  to  avoid  utter  stultification, 
that  there  exists  what  is  purely  an  imaginary  distinction 
between  the  principles  which  govern  the  market  value 
of  imperishable  and  perishable  commodities.  He  says, 
"  to  fix  by  law  a  relative  value  between  sugar  and  coffee, 
between  two  perishable  commodities,  or  a  legal  tender 
and  a  commodity,  would  be  a  ridiculous  attempt."  But 
"nothing,"  he  observes,  "is  easier  than  to  fix  by  law  the 
relative  value  between  two  everlasting  legal  tenders,  gold 
and  silver."  Having  in  view  the  principles  I  have  postu- 
lated, I  could  not  find  words  so  well  selected  as  those 
quoted  from  M.  Cemuschi,  to  push  his  own  theory  to 
the  argumentum  ad  absurdum. 

20.  Even  if  the  production  of  both  these  "everlast- 
ing" metals  was  stopped,  the  demand  alone  for  con- 
sumption, in  all  its  numerous  ways,  would  continually 
change  and  fluctuate.  Taste,  fashion,  and  the  cunning 
of  workmen,  in  designing  new  and  pleasing  ornaments 
and  works  of  art  out  of  these  metals,  would  keep  their 
market  value  continually  fluctuating  or  oscillating  up  and 


NOMISMA,    OR    LEGAL   TENDER,    AND    BI-METALISM.        59 

down.  The  laws  of  nature  are  more  "  unchangeable " 
than  those  of  the  "  Medes  and  Persians,"  and  do  not 
admit  of  such  exceptions  as  M.  Cemuschi  thus  boldly 
proclaims.  His  assertion  is  a  mere  brutum  fulmen,  on 
a  par  with  the  "Pope's  bull  against  the  comet." 

21.  I  fail  to  see  one  single  advantage  established, 
even  if  the  arguments  of  those  who  favor  the  proposed 
bi-metallic  currency  were  logical  and  true,  that  is  not 
better  attained  by  a  gold  standard  of  value.  On  the 
other  hand,  I  see  dishonor,  disgrace,  folly,  and  vast  pub- 
lic and  private  inconvenience  as  certain  to  arise  from  the 
carrying  out  of  the  new  law  of  Congress  as  that  the  sun 
will  continue  to  rise  and  set. 

22.  The  following  fluctuations  in  the  market  value  of 
silver,  indicating  its  trading  power  at  various  periods 
since  the  discovery  of  the  silver  mines  of  Potosi  in  1545, 
have  kindly  been  furnished  me  by  Mr.  Henry  Kemp 
of  Brooklyn,  a  Scotch  gentleman  well  versed  in  correct 
economic  principles.  "Silver  fell  in  price,"  says  Mr. 
Kemp,  "after  the  opening  of  the  Potosi  mines,  from 
1545  to  1697,  29.4  per  cent;  then  rose  in  value,  as 
compared  with  gold,  from  1697  to  1776,  5.52  per  cent; 
then  it  fell  in  price,  from  1776  to  184S,  6.9  per  cent; 
then  rose  again,  from  1849  to  1859,  4.25  ;  from  1859  to 
July,  1876,  it  fell  25.5  per  cent;  and  from  July,  1876, 
to  8th  August,  1877,  it  once  more  rose  16  per  cent." 
I  add,  since  then  to  April  1,  1879,  it  has  fallen  10  per 
cent ;  and  this  is  the  metal  that  the  law  of  Congress  in 
a  few  years  will  substitute  for  gold  as  the  American 
standard  of  value. 

23.  The  following  extract  from  a  letter  addressed  by 
M.  Cemuschi,  from  Paris,  to  his  friend,  Mr.  B.  F.  Nourse 
of  Boston,  during  the  agitation  of  the  silver  bill  in  Con- 
gress, is  given  in  justice  to  him,  and  as  sustaining  my 
statement  respecting  bi-metalism  in  France  and  the  effect 
of  the  American  law  :  — 


60  CURRENCY. 

"  It  appears  that  the  United  States  Government  has  made  some 
engagement  with  the  syndicate  of  the  4  per  cents,  and  possibly  the 
President  will  veto  a  bill  re-opening  the  mint  to  the  free  coinage  of 
silver.  But  let  us  suppose  that  the  Congress  resists  the  veto,  and 
that  the  old  silver  dollar  is*  rehabilitated  in  full.  What  the  conse- 
quences ? 

"All  the  new  silver  of  Nevada  and  the  old  silver  of  Germany 
would  be  brought  to  the  American  mint  for  coinage,  and  all  gold 
would  be  exported  from  America  to  Europe.  Against  this  asser- 
tion 'The  Cincinnati  Commercial'  quotes  France,  where  silver 
and  gold  circulate  side  by  side,  and  from  where  gold  is  not  ex- 
ported. That  is  true  ;  but  why  is  gold  not  exported  from  France  ? 
Because  silver  is  not  coined,  and  consequently  no  silver  is  intro- 
duced into  France.  Should  France  re-open  her  mint  to  silver,  she 
would  absorb  the  American  and  German  silver,  and  lose  her  gold. 
But,  with  the  United  States  coining  silver  at  the  ratio  16,  France 
cannot  re-open  her  mint  for  coining  five-franc  pieces,  which  are  at 
the  ratio  15!;  and  then  the  United  States  will  sell  at  a  premium 
all  their  gold  dollars  against  silver.  In  fact,  the  United  States 
will  become  a  silver  monometallic  country,  just  the  same  as  Eng- 
lish India. 

"  Here  it  is  asked,  what  will  then  be  the  relative  value  of  silver 
and  gold  on  the  general  market,  especially  in  London  ?  I  answer, 
always  fluctuating.  While  America  has  gold  to  give  in  exchange 
for  silver,  the  value  of  silver  can  be  high.  When  the  American 
gold  shall  be  exhausted,  the  value  of  silver  will  be  weak.  Various 
foreseen  and  unforeseen  circumstances  will  later  determine  con- 
tinuous changes  in  the  respective  value  of  gold  and  silver.  With- 
out a  bi-metallic  law  fixing  the  same  legal  ratio  in  the  principal 
countries,  the  relative  value  of  gold  and  silver  cannot  be  more 
stable  than  the  relative  value  of  sugar  and  coffee." 

24.  One  of  the  chief  arguments  urged  by  the  bi-metal- 
lists  is,  that  their  theory,  if  forced  into  effect  by  the  arbi- 
trary power  of  a  combination  of  national  governments, 
regardless  of  the  natural  laws  of  industry,  would  create 
an  artificial  market  for  silver.  According  to  these  gentle- 
men, the  depreciation  of  silver  would  thus  be  arrested. 
They  propose  to  compel  the  people  of  the  whole  civilized 
world  to  use  a  tool  that  is  not  the  best,  and  which  they 
refuse  to  use  if  they  are  allowed  to  choose  for  themselves. 


NOMISMA,    OR   LEGAL   TENDER,    AND    BI-METALISM.        6 1 

The  public  needs  a  moderate  supply  of  these  tools  for 
special  uses,  —  for  change,  or  fractional  currency,  for 
small  purchases,  and  car  and  omnibus  fares.  But  the 
bi-metallist  says,  "  You  must  take  more.  You  must  em- 
ploy a  servant  or  a  cart  to  carry  your  money,  if  needful." 
The  plan  overthrows  the  theory  of  making  the  two  kinds 
of  metallic  money  interconvertible,  and  leaving  it  to  the 
choice  of  the  people  to  decide  how  much  of  each  kind 
they  will  have,  which  is  the  true  one,  founded  on  natu- 
ral laws. 

25.  All  laws  made  to  force  on  the  people  the  use  and 
consumption  of  commodities  they  do  not  desire  is  the 
same  as  laws  to  compel  them  to  part  with  their  labor  and 
goods  at  prices  to  be  arbitrarily  set  by  the  state.  The 
true  theory  of  bi-metalism  is  to  let  the  people  decide 
how  much  of  each  kind  of  coins  they  require.  The 
reader  will  find  this  more  fully  set  forth  in  chapters  XXV., 
XXVI.,  and  XXVII. ;  and  M.  Cemuschi  and  other  bi- 
metallists  are  respectfully  requested  to  study  those  chap- 
ters, and  indeed  the  whole  of  this  work,  before  attempt- 
ing to  answer  the  reasons  offered  in  this  chapter  against 
the  correctness  of  their  theory.  When  they  come  to 
comprehend  the  excessive  absurdity  of  making  any  but 
the  fittest  metal  the  standard  and  measure  of  value,  they 
will  perceive  the  equal  absurdity  of  attempting  to  en- 
hance the  market  value  of  another  metal,  unsuited  for 
any  but  a  small  supply  of  subsidiary  coins,  by  giving  to 
it,  by  law,  a  fictitious  value.  The  fallacy  of  the  theory 
is  so  glaring,  so  at  variance  with  common  sense,  and  so 
mischievous  in  its  principle  and  practice,  that  the  term 
"silver  lunatics  "  can  hardly  be  regarded  as  too  severe  a 
characterization  of  its  advocates. 


62  CURRENCY. 


CHAPTER  VII. 

THE   ORGANIZATION   OF  THE   BANK   OF  ENGLAND.  —  THE   LAW, 
THE    FACT,    AND    THE    SCIENCE    OF   THE   CASE. 

i .  The  conspicuous  position  which  the  Bank  of  Eng- 
land occupies  in  the  monetary  and  financial  affairs  of  the 
world,  and  the  vast  influence  and  prestige  of  the  bank 
itself,  render  it  indispensable  to  consider  very  fully  the 
principles  involved  in  the  plan  of  its  organization,  and 
the  policy  of  its  managers,  which  has  become  traditional. 
This  chapter  will  be  devoted  to  the  former,  and  to  show- 
ing that  the  policy  and  practice  are  at  variance  with  the 
true  intent  and  scope  of  the  law,  and  with  the  principles 
of  sound  banking. 

2.  I  have  examined,  with  great  patience,  many  of  the 
works  that  have  been  written  on  this  prolix  subject  since 
the  passage  of  the  Act  of  1844,  known  as  Sir  Robert 
Peel's  Act,  which  gave  rise  to  the  policy  ever  since 
carried  out  without  change,  and  which  seems  to  have 
made  of  the  bank  a  mere  automaton,  so  far  as  the  issue 
and  circulation  of  notes  are  concerned.  What  I  propose 
to  show  is,  that  the  Bank  Act  of  1844  leaves  to  the  bank 
a  large  scope  of  discretionary  power  in  respect  to  the 
issue  and  use  of  notes,  which  it  has  never  exercised ;  and 
that  to  this  circumstance  is  mainly  due  the  chief  evils 
of  the  British  monetary  and  financial  system. 

3.  Let  us  first  see  what  the  law  says,  and  next  what 
are  the  facts  in  respect  to  its  interpretation,  and  the  prac- 
tice under  the  law ;  and  finally  what  science  suggests  as 
the  true  policy.  The  law  says,  "  That  from  and  after  the 
thirty-first  day  of  August,  1844,  the  issue  of  promissory 
notes  of  the  Governor  and  Company  of  the  Bank  of 
England,  payable  on  demand,  shall   be    separated   and 


THE    ORGANIZATION    OF   THE    BANK    OF    ENGLAND.         63 

thenceforth  kept  wholly  distinct  from  the  general  banking 
business  of  the  said  Governor  and  Company ;  and  the 
business  of  and  relating  to  such  issue  shall  be  thence- 
forth conducted  and  carried  on  by  said  Governor  and 
Company  in  a  separate  department,  to  be  called  the  Issue 
Department  of  the  Bank  of  England,  subject  to  the  rules 
and  regulations  hereinafter  contained."  The  Act  then 
specifies  that  the  "  Court  of  Directors  may,  if  they  think 
fit,  appoint  a  committee  or  committees  of  Directors,  for 
the  conduct  and  management  of  such  Issue  Department." 
The  second  clause  provides  that  "there  shall  be  trans- 
ferred, apportioned,  and  set  apart  by  the  said  Governor 
and  Company,  to  the  Issue  Department  of  the  Bank  of 
England,  securities  of  the  value  of  fourteen  million  pounds, 
whereof  the  debt  due  by  the  public  to  the  said  Governor 
and  Company  shall  be  and  be  deemed  a  part ;  there 
shall  also,  at  the  same  time,  be  transferred,  appropriated, 
and  set  apart  by  the  said  Governor  and  Company,  to  the 
said  Issue  Department,  so  much  of  the  gold  and  silver 
bullion  then  held  by  the  Bank  of  England  as  shall  not  be 
required  by  the  Banking  Department  thereof."  I  have 
italicized  the  last  words,  as  they  will  be  made  to  explain 
wherein  the  bank  has  failed  to  meet  the  spirit  of  the  law, 
and  to  demonstrate  the  fundamental  error  of  the  practice 
of  the  bank. 

4.  The  Act  next  provides  that  the  Issue  Department 
shall  deliver  to  the  Banking  Department  a  gross  amount 
of  notes,  including  those  in  circulation  and  in  hand, 
equal  to  the  ^14,000,000  of  securities  which  the  Bank- 
ing Department  has  handed  over  to  the  Issue  side,  along 
with  "  so  much  gold  and  silver  bullion  "  as  the  bank  did 
not  require  for  its  business. 

5.  It  will  be  observed  that  the  law  is  mandatory;  the 
word  "  shall "  being  used  in  respect  to  the  first  step  in 
organizing,  and  fixes  the  amount  of  notes  and  securities 


64  CURRENCY. 

at  ;£i 4,000,000  ;  and  the  first  statement  issued  under  it 
on  the  first  day  of  September,  1844,  sets  out  with  the 
maximum.  But  the  next  provision  shows,  that,  after  the 
organization  on  the  distinct  basis  specified,  the  bank 
directors,  as  managers  of  the  Issue  Department,  were  at 
liberty  to  diminish  the  note  issue  to  the  bank  pari  passu, 
with  the  amount  of  securities  held  or  deposited  with  the 
Issue  Department.  The  Act  says  of  the  notes  so  to  be 
delivered  to  the  Banking  Department,  they  "  shall  be 
deemed  to  be  issued  on  securities,  coin,  and  bullion,  so 
appropriated  and  set  apart  to  said  Issue  Department " 
(that,  of  course,  means  the  entire  notes  issued)  ;  and  it 
further  makes  this  important  provision,  which  the  man- 
agers have  totally  ignored,  and  treated  as  a  dead  letter. 
"  It  shall  be  lawful  for  said  Governor  and  Company 
to  diminish  the  amount  of  such  securities,  and  again  to 
increase  the  same  to  any  sum  not  exceeding,  in  the 
whole,  the  sum  of  fourteen  million  pounds,  and  so 
from  time  to  time  as  they  shall  see  occasion." 

6.  The  points  I  propose  to  make  may  as  well  be  stated 
here.  They  are,  that  by  inference,  if  not  by  the  express 
words  of  the  law,  the  bank  possesses  full  and  discre- 
tionary power  in  respect  to  the  amount  of  "  gold  and 
silver  coin  and  bullion "  to  be  held  for  the  conduct 
of  its  banking  business ;  and  also  might  increase  and 
diminish  its  note  circulation  within  the  specified  limita- 
tion of  ^14,000,000  (now  increased  to  ^15,000,000 
by  the  lapsing  of  country  bank  circulation  provided  for 
by  the  Act),  and  thus  control  the  outgo  and  inflow 
of  notes  according  to  the  indications  of  supply  and 
demand.  I  shall  also  show,  that,  by  not  observing 
and  acting  on  such  indications,  and  by  treating  its  own 
notes  issued  on  securities,  which,  like  all  the  note  issue, 
are  not  legal  tender  at  its  own  counter,  as  good  cash 
reserve,  the  bank  trades  on  too  small  a  margin  of  actual 


THE   ORGANIZATION   OF   THE    BANK   OF    ENGLAND.  65 

cash  reserve,  and  hence  is  most  sensitively  affected  by 
the  trade  in  bullion. 

7.  The  first  statement  issued  showed  the  fact  that  the 
Banking  Department  had  transferred  to  the  Issue  side 
^14,351,000  of  metal,  and  had  retained,  as  "actual" 
cash  reserve,  ^858,000  against  the  following  immediate, 
or  instant  liabilities  ;  to  wit :  — 

Public  deposits ^3,631,000 

Other  deposits 8,644,000 

Uncovered  notes 5,825,000 

Total ^18,100,000 

The  bank  thus  started  on  the  fundamental  error  of 
treating  its  own  notes,  issued  on  securities,  as  good  cash 
reserve,  and  has  so  continued  to  treat  them  to  the  pres- 
ent time  (which  is  not  sound  banking),  with  less  than  one- 
eighteenth  of  its  instant  liabilities  in  actual  cash.  The 
fault  of  the  law,  it  will  thus  be  seen,  consisted  in  not 
requiring  all  notes  issued  above  the  amount  of  securities, 
so  deposited,  to  be  always  kept  separate  from  the  others, 
and  all  the  metal  received  for  them  to  be  held  sacred 
for  their  redemption  to  the  last  pound.  As  the  practice 
is,  the  cash  is  what  the  managers  first  lay  their  hands  on 
to  redeem  notes,  and  the  securities  are  left  as  a  dernier 
resort. 

8.  Before  proceeding  farther,  let  us  suppose  that  the 
law  had  been  so  framed  as  to  have  required  the  bank 
to  use  the  ^14,000,000  of  securities  as  trading  capital 
instead  of  drawing  on  the  stock  of  metal,  —  what,  in 
this  case,  would  have  been  the  conduct  of  the  bank? 
Would  it  have  regarded  the  ,£856,000  of  coin  as  ade- 
quate cash  to  hold  for  immediate  calls,  and  "send 
round  the  corner"  into  Lombard  Street,  and  raise  cash 
on  securities,  whenever  depositors  came  for  cash,  beyond 
the  "till  money"  on  hand?      It  is  the  "hocus-pocus" 


66  CURRENCY. 

manner  of  jumbling  up  in  the  Act  the  words  "  shall  be 
deemed  to  be  issued  on  securities,  coin,  and  bullion," 
that  deceives  otherwise  good  reasoners.  The  Issue  De- 
partment of  the  bank,  being  wholly  separated  from  the 
Business  Department,  is  a  statutory  state-office,  acting  as 
trustee  for  the  notes  issued  by  it,  one  portion  of  which 
are  secured  by  government  stock,  and  another  portion  by 
gold  and  silver  bullion  and  coin ;  and  the  bank  treats  all 
the  notes  exactly  as  if  they  were  issued  wholly  on  "  coin 
and  bullion."  It  is  absurd  to  suppose  that  an  Act  of 
Parliament  can  alter  a  logical  fact.  I  shall  presently 
show  that  the  notes  held  by  the  bank  are  in  actual  cir- 
culation, or  the  same  as  if  they  were  held  by  the  public,  — 
that  the  moment  they  pass  out  of  the  Issue  Department 
they  are,  in  theory  and  practice,  in  circulation.  But, 
as  the  bank  itself  is  liable  for  them,  the  securities  in 
the  Issue  Department  are  the  same  in  effect  as  if  in  the 
Banking  Department.  They  can  be  used  at  any  time  by 
handing  over  notes  in  exchange. 

9.  The  claim  that  the  practice  of  the  bank  is  the 
result  of  the  law  must  be  abandoned ;  since  it  leaves  it 
entirely  discretionary  with  the  directors  to  increase  or 
diminish  the  amount  of  notes  issued  on  securities,  so  it 
does  not  exceed  the  limitation  set  by  law.  There  is  no 
compulsion  in  the  matter.  Other  banks,  which  keep 
their  trading  balances  at  the  Bank  of  England,  being 
able  to  use  Bank  of  England  notes  as  legal  tender,  or 
cash,  are  not  likely  to  call  for  large  sums  of  gold ;  and 
hence  the  bank  might  be  excused  from  making  it  a  prac- 
tice to  keep  on  hand  as  large  an  amount  of  actual  cash 
reserve  as  ordinary  bankers.  But  the  root  of  the  evil 
is  unquestionably  in  the  principle  of  issuing  notes  at  all 
on  securities.  If  it  is  good  trading  for  a  bank  to  invest 
all  its  own  capital  in  long  or  perpetual  securities,  it  is 
equally  good  trading  for  merchants  to  do  the  same 
thing. 


THE   ORGANIZATION   OF  THE   BANK   OF   ENGLAND.         67 

10.  In  the  face  of  the  clear  and  precise  language  of 
the  Act,  which  authorizes  the  bank  to  lower  and  raise  the 
amount  of  securities  in  the  Issue  Department,  and,  as 
a  matter  of  course,  to  make  similar  changes  in  the 
amount  of  notes  issued  thereon,  the  following  extract 
from  the  treatise  of  Mr.  Thomson  Hankey,  a  former 
Governor  of  the  bank,  reads  somewhat  strangely  :  "  It 
must  always  be  borne  in  mind,  that,  since  the  Act  of 
1844,  the  directors  have  had  no  control  over  that  part  of 
the  currency  which  consists  of  bank  notes ;  that  is,  they 
have  had  nothing  whatever  to  do  with  the  amount  at  any 
time  in  circulation  in  the  country." 

11.  This  assertion,  which  lies  at  the  foundation  of  the 
error  of  the  bank,  is  true  neither  in  fact  nor  in  principle. 
The  notes  held  in  the  Banking  Department  are  in  circu- 
lation the  moment  they  leave  the  Issue  Department,  just 
as  much  as  when  they  pass  into  the  hands  of  other  banks 
and  the  people  at  large,  and  are  only  evidences  of  the 
bank's  indebtedness.  They  are  in  no  sense  cash  in  the 
hands  of  the  bank.  How,  then,  can  they  be  so  treated  ? 
True  it  is,  by  a  legal  fiction,  the  bank  ceased  to  be  a 
bank  of  issue  after  the  passage  of  the  Act  of  1844;  but 
in  fact,  and  in  logical  sequence,  it  is  a  bank  of  issue  as 
much  as  ever,  as  to  the  notes  issued  on  securities.  The 
bank  is,  in  fact,  liable  for  all  the  notes  it  gives  out.  The 
only  effect  of  the  Act  is  to  compel  the  directors,  in  their 
capacity  as  managers  of  the  Issue  Department,  to  hold 
the  "  securities,  coin,  and  bullion,"  on  which  the  law  has 
"  deemed  "  the  notes  to  be  issued,  as  sacred  for  their 
redemption.  The  law  cannot  change  the  scientific  and 
actual  fact  that  the  bank  has  all  its  capital,  and  the 
"  rest "  fund  besides,  invested  in  the  securities  in  ques- 
tion. 

12.  Mr.  Leonard  Courtney,  M.P.,  author  of  the  excel- 
lent article  in  the  "  Enyclopsedia  Britannica,"  ninth  edi- 


68  CURRENCY. 

tion,  on  Banking,  takes  the  same  view  in  effect  on  this 
subject ;  namely,  that  the  reserve  of  notes  held  in  the 
Banking  Department  "are  just  as  much  in  circulation 
as  if  they  were  in  the  pockets  and  tills  of  the  people." 
To  have  followed  this  clear  and  important  admission  to 
its  logical  result,  would  have  forced  Mr.  Courtney  to  the 
conclusion  I  have  reached  and  presented,  respecting  the 
impolicy  of  the  bank  treating  any  notes  it  may  hold  up 
to  the  statutory  /imitation  the  same  as  actual  cash. 
Whatever  it  may  occasionally  hold,  above  that  limitation, 
may,  in  effect,  be  so  treated,  because  such  excess  of 
notes  has  gold  behind  it  in  the  Issue  Department. 

13.  Mr.  Courtney,  not  having  a  clear  perception  of  the 
operation  of  the  Bank  Act,  but  seeing  the  confusion  of 
ideas  resulting  from  its  interpretation  by  the  managers 
and  the  city,  suggests  a  removal  of  the  note  issue  to  some 
other  locality  as  desirable,  in  order  to  change  the  practice 
of  bankers.  He  says,  "  the  purely  mechanical  act  of 
removing  the  issue  of  notes  from  Threadneedle  Street 
would  make  the  facts  of  the  situation  plain,  and  would 
bring  about  an  alteration  of  conduct  among  London 
bankers,  so  that  it  should  conform  to  the  facts  thus  per- 
ceived." 

If  the  present  system  of  issuing  notes,  and  calling  them 
"  Bank  of  England  Notes,"  and  holding  the  bank  legally 
liable  for  them,  is  to  be  continued,  Mr.  Courtney's  sug- 
gestion seems  to  me  impracticable  without  a  complete 
change  of  the  law  and  practice.  But  allowing  it  to  be 
susceptible  of  execution,  —  that  is,  "  the  mechanical  act 
of  removing  the  issue  of  notes  from  Threadneedle  Street," 
—  we  will  suppose  to  Whitehall,  —  the  bank  itself  would 
be  the  first  to  perceive  the  error  of  its  present  system  of 
treating  the  evidences  of  its  own  instant  or  present  liabil- 
ities as  good  trading  reserve.  The  bank  cannot,  on  any 
principle  of  legal  fiction  or  commercial  casuistry,  treat 


THE   ORGANIZATION   OF  THE    BANK   OF   ENGLAND.        69 

a  security  for  its  own  indebtedness  as  reserve.  As  to  the 
securities  held  by  the  Issue  against  the  Banking  Depart- 
ment, they  are,  pro  tanto,  a  guaranty  of  the  note  circula- 
tion ;  and  so  many  of  the  notes,  in  amount,  as  are  issued 
on  securities,  must  be  held  to  be  only  Bank  of  England 
obligations  in  effect  and  in  principle. 

14.  As  to  the  claim  of  Mr.  Hankey,  "that,  since  the 
Act  of  1844,  the  directors  have  had  no  control  over  that 
part  of  the  currency  which  consists  of  bank  notes,"  that 
is  only  true  as  to  those  issued  on  metal.  The  law  sets 
no  limit  to  the  amount  of  notes  issuable  on  gold  and 
silver  coin  and  bullion.  The  issue  on  gold  coin,  or  for 
gold  bullion  for  coinage,  is,  in  fact,  the  only  true  and 
scientific  method  of  issuing  notes  ;  as  I  shall  fully  demon- 
strate. I  cannot  agree  with  those  who  point  with  satis- 
faction to  periods  when  a  large  part  of  the  bank's  share 
of  the  notes  are  lying  idle,  on  the  ground  that  the  "  ratio 
between  reserve  and  liabilities  ""  is  thus  increased  ;  nor 
can  I  share  the  alarm  which  these  gentlemen  affect  to 
feel  when  a  sudden  demand  from  abroad,  or  the  country, 
for,  say,  ten  of  the  twenty-five  or  thirty  millions  of  metal 
held  in  the  Issue  Department,  lowers  the  ratio  of  note 
reserve  to  "  the  danger  level,"  when  the  managers  make 
spasmodic  efforts  "  to  stop  the  drain,"  and  bring  back  the 
fugitive  metal  by  raising  the  rate.  The  working  of  this 
plan  will  be  vividly  perceptible  by  going  a  step  farther  in 
the  direction  of  a  coming  panic,  which  has  been  hastened, 
if  not  originated,  by  this  sudden  and  sharp  rise  in  the 
bank  rate  above  the  market  rate.  It  is  then  that  people 
rush  in  for  discounts  to  meet  possible  future  requirements 
for  capital,  which  otherwise  might  not  occur.  Depositors 
call  for  notes  and  coin  to  be  able  to  meet  apprehended 
calls  on  them.  Thus  the  reserve  melts  away  "like  the 
baseless  fabric  of  a  dream."  It  needs  no  argument  to 
prove  that  this  is  neither  science  nor  good  practical  bank- 


70  CURRENCY. 

ing.  The  managers  and  the  public  have  simply  mistaken 
the  cause  for  the  effect.  The  conduct  of  the  bank  man- 
agers has,  in  fact,  been  the  cause,  not  the  result,  of  the 
demand  for  discounts. 

15.  If  the  directors,  in  their  capacity  of  managers  of 
the  Issue  Department,  were  precluded  from  issuing  notes 
on  the  commodity,  bullion,  and  were  required  to  sell 
them  for  coin  only,  leaving  the  mint  to  supply  the  coin, 
as  at  present,  the  trade  in  bullion  would  be  left  by  the 
bank  "  severely  alone,"  and  in  the  hands  of  merchants 
and  brokers.  In  this  case  the  ebb  and  flow  into  and  out 
of  the  bank's  cellars  would  cease  to  be  watched  with  such 
painful  interest,  in  times  of  industrial  excitement,  by  mer- 
chants, and  dealers  in  capital.  The  bank  itself  would 
cease  to  rely  on  the  Issue  Department  or  the  Govern- 
ment for  aid  in  the  contingency  of  a  drain  of  a  few 
millions  of  metal  for  export  or  for  the  provinces.  The 
securities,  money  and  bullion,  held  by  the  Issue  Depart- 
ment, are  a  trust-fund  for  the  note-holders  ;  and  when 
the  bank  draws  metal  only,  by  presenting  its  own  share 
of  the  notes  which  it  receives  because  of  a  paltry  loan  to 
the  nation,  and  which  are  in  no  way  distinguishable  from 
the  others,  it  is  laying  its  hands  on  other  folks'  goods. 
The  right  thing  for  it  to  do  would  be  to  draw  from  its 
stock  of  securities,  according  to  the  promissory  clause  of 
the  law,  and  bury  its  gold  in  the  market,  maintaining, 
always,  an  equilibrium  between  the  gold  in  the  issue  and 
the  notes  outside  of  the  bank.  In  other  words,  the 
bank's  share  of  the  notes  loaned  to  it  on  securities  should 
not  be  legal  tender  at  the  Issue  Department,  except  in 
redemption  of  securities  ;  and  such  notes  ought  to  be 
made  distinguishable  from  notes  issued  on  gold. 

16.  Mr.  Hankey  has  very  well  described  what  consti- 
tutes a  good  cash  reserve  for  a  banker  to  hold,  and  con- 
victs the  Bank  of  England  of  bad  banking.     He  says,  — 


THE   ORGANIZATION   OF   THE   BANK   OF   ENGLAND.         7 1 

"  The  first  clearly  admitted  duty  of  every  deposit  banker  is 
always  to  retain  at  his  command,  in  cash,  a  certain  amount  of  his 
deposits.  When  this  amount  has  been  kept  at  about  one-third  of 
the  whole  (liabilities,  he  should  have  added),  and  the  remainder 
of  the  deposits  invested  in  what  are  ordinarily  good  banking  securi- 
ties, ...  no  banker  need  apprehend  difficulty."  Again,  he  says, 
"  The  mercantile  and  banking  community  must  be  undeceived  in 
the  idea  that  promises  to  pay  at  a  future  date  can  be  converted  into 
immediate  payment  without  a  supply  of  ready  money." 

17.  The  point  I  make  against  Mr.  Hankey  and  the 
bank  theorists  generally,  is,  that,  because  the  law  does 
not  discriminate  between  notes  issued  on  securities  and 
notes  issued  on  metal,  the  bank  treats  the  whole  issue  as  if 
it  were  made  on  metal.  In  this  particular  the  law,  as 
well  as  the  practice  of  the  bank,  is  at  fault.  It  is  my  pur- 
pose to  show  conclusively,  however,  that  the  bank  has  it 
in  its  power,  by  diminishing  the  amount  of  notes  issued 
on  securities,  and  holding  a  larger  amount  of  metallic 
money  in  its  Business  Department,  to  obviate  much  of 
the  sensitiveness  it  now  perpetually  engenders  in  indus- 
trial circles  by  its  efforts  to  regulate  the  trade  in  bullion 
by  raising  and  lowering  the  rate.  The  best  thing  to  be 
done  is  to  sell  all  its  securities,  and  bank  on  cash.  That 
is  the  only  true  remedy  for  the  evils  in  question. 

18.  To  sum  up  the  arguments  on  which  I  rest  the  con- 
clusions I  have  arrived  at  respecting  the  treating  of  notes 
founded  on  securities  as  good  trading  reserve,  — 

1  st,  The  treating  all  the  notes  as  "issued  on  securities 
and  gold  and  silver  coin  and  bullion,"  as  if  they  were 
issued  only  on  metal,  is  inadmissible,  both  as  a  practical 
and  logical  conclusion,  and  is  a  fundamental  error  on  the 
part  of  the  bank. 

2d,  Notes  issued  on  securities  are  no  better,  for  a 
trading  reserve,  than  the  securities  themselves,  which  are 
always  lowest  in  market  value  when  the  reserve  is  most 
needed,  and  when  their  sale  in  large  amounts  would 
greatly  lower  their  market  value. 


72  CURRENCY. 

3d,  If  the  plan  of  investing  all  the  trading  capital  of 
a  bank  in  government  securities  is  a  safe  and  good  one 
for  it,  it  is  equally  safe  and  good  for  all  business  houses, 
and,  as  before  observed,  for  all  other  banks. 

4th,  This  inevitable  conclusion  involves  the  absurdity 
of  everybody  investing  their  entire  trading  capital  in  such, 
or  equally  safe,  securities,  and  conducting  their  business 
on  borrowed  means,  as  the  Bank  of  England  and  the 
national  banks  of  the  United  States  do. 

19.  Those  who  accept  the  dogmas  of  the  Bank  of  Eng- 
land as  infallible,  like  Mr.  Hubbard,  who,  in  a  speech  in 
Parliament,  said,  "  the  practice  of  the  bank  is  perfect," 
and  that  the  evils  of  the  British  industrial  system  "are 
wholly  due  to  bad  trade,"  will  treat  these  logical  con- 
clusions with  scorn,  simply  because  they  are  logical  and 
unanswerable.  But  there  are  many  excellent  and  successful 
business  men,  who  amass  a  million  or  more  in  city  trade, 
who  can  no  more  comprehend,  either  the  process  or  the 
result  of  a  mathematical  demonstration  than  they  can 
Hebrew  or  Sanscrit.  I  am  not  writing  with  the  slightest 
hope  of  making  converts  of  such.  I  do,  however,  hope 
to  obtain  from  some  one  of  this  class  a  reply  to  one  ques- 
tion ;  to  wit,  "  What  would  be  the  conduct  of  the  bank, 
in  respect  to  its  trading  reserve,  if  the  issue  of  notes  were 
transferred  to  Whitehall,  and  the  bank's  share  of  notes, 
issued  on  securities,  were  alone  delivered  to  it,  and  the 
metal  on  which  the  others  were  issued  was  held  by  the 
Issue  Department  for  redemption  only  of  the  notes  issued 
on  metal?  "  I  am,  of  course,  presuming  that  the  bank  is 
bound  to  find  the  cash  for  redeeming  its  quota  of  notes, 
just  as  the  United  States  national  banks  must  do  under 
specie  payments.  This  remark  will  show  the  decided 
superiority  of  the  American  over  the  British  system,  both 
of  which  are  fundamentally  wrong,  and  must  sooner  or 
later  be  changed.     I  furthermore  invite  all  who  dissent 


PROFESSOR    BONAMY    PRICE    ON   THE'  BANK    CHARTER.        73 

from  the  position  taken  in  this  chapter,  to  read  the  next 
two  chapters,  if  not  the  whole  work.  They  will  then 
be  able  to  compare  the  present  system  with  one  demon- 
strated to  be  theoretically  perfect. 


CHAPTER  VIII. 

PROFESSOR   BONAMY   PRICE   ON  THE   BANK   CHARTER. 

i .  Professor  Price,  in  his  work  on  "  Currency  and 
Banking"  (Henry  S.  King  &  Co.,  London,  1876),  it  will 
be  seen,  by  reference  to  pp.  62  to  68,  has  fallen  into 
several  serious  errors,  like  nearly  all  writers  on  the  Bank 
Act,  two  of  which  I  will  notice.  At  p.  62  he  states 
emphatically,  that  "In  the  Issue  Department  the  bank 
directors  have  no  more  authority  or  right  to  speak  or 
act  than  any  other  person  in  the  kingdom."  But  I  reply, 
these  same  directors,  or  a  committee  of  them,  constitute 
the  managers  of  this  same  "  Issue  Department,"  and  by 
the  express  terms  of  the  Act,  cited  at  the  end  of  para- 
graph five  of  the  foregoing  chapter,  have  power  "to 
diminish  the  amount  of  such  securities  "  (^15,000,000), 
"  and  again  to  increase  the  same  ...  as  they  shall  see 
occasion." 

2.  At  p.  67  he  has  fallen  into  an  equally  palpable  and 
mischievous  error,  where  he  claims  that  the  notes  pre- 
sented to  the  bank  for  payment  are  not  the  notes  issued 
on  securities.     Here  is  what  he  says  :  — 

"There  has  never  been,  since  1844,  the  slightest  ten- 
dency of  a  run  upon  the  bank  for  the  payment  of  a 
single  one  of  the  fifteen  millions  of  notes."  The  notes 
"  shall  be  deemed  to  be  issued  on  securities,  coin,  and 
bullion;'''  so  runs  the  language  of  the  Act.  It  there- 
fore follows,  in  a  legal  point  of  view,  there  is  no  distinc- 


74  -  CURRENCY. 

tion  between  notes  issued  on  securities,  coin,  and  bul- 
lion.   They  are  all  notes  of  the  Bank  of  England  ;  and  the 
bank  directors,  acting  as  managers  of  the  Issue  Depart- 
ment, have  perfect  and  unquestioned  power  to  diminish 
and   increase  the  amount  of  notes  within  the  statutory 
limit  of  (at  present)  ^15,000,000.     Hence,  as  a  logical 
and  incontrovertible  economic  fact  as  well  as  principle, 
the  first  notes,  in  times  of  panic,  or,  indeed,  on  all  oc- 
casions, presented  for  payment  are  notes  founded  on  secu- 
rities.    In  other  words,  they  are  the  notes  growing  out 
of  the  business  of  the  bank,  not  of  the  Issue  Department. 
Mr.  Price  seems  to  have  overlooked  the  fact,  stated  by 
Sir  John  Lubbock  in  his  speech  in  the  House  of  Com- 
mons in  1873,  that  the  Bank  of  England,  as  a  bank,  is 
liable  for  every  note  issued  from  the  Issue  Office.     It  is 
the  height  of  absurdity  to  claim  that  the  fiction  of  having 
a  separate  issue  office  has  done  any  of  the  acts  imputed 
to  it ;  or  that,  because  this  office  stores  the  securities  and 
metal,  the  Bank  of  England  does  not  deal  or  speculate 
in  both  securities  and  metal.     If  the  fluctuations  in  the 
gross  volume  of  notes  were  not  within  the  limits  of  the 
amount  of  notes  issued  to  the  bank  on  securities,  the  bank 
would  not  be  so  sensitive  about  the  loss  of  a  few  millions, 
or  even  the  whole  of  the  metal  occasionally ;  and  if  the 
directors  ever  come  to  understand  the  true    principles 
of  banking,  and  cease  to  treat  their  own  share  of  the 
notes  issued  on  securities  as  good  reserve,  they  will  at 
once  perceive  the  gross  fundamental  error  on  which  they 
now  act.     At  p.  66  Professor  Price  correctly  says,  "  The 
gold   stored   and   kept   in   the  Government   Office,  the 
Issue  Department,  in  no  sense  belongs  to  the  Bank  of 
England.     It  is  no  part  of  its  reserve  ;  and  it  is  a  great 
misfortune  that  the  framers  of  the  Act  of  1844  should 
have  made  the  exceedingly  unintelligent  blunder  of  mix- 
ing up  together,  in  the  weekly  reports  of  the  bullion  at  the 


PROFESSOR   BONAMY   PRICE   ON   THE    BANK   CHARTER.       75 

bank,  two  absolutely  dissimilar  and  distinct  things,  —  the 
gold  stored  away  by  one  office  to  face  the  bank-notes, 
and  the  gold  belonging  to  the  Bank  of  England  as  a 
banker."     This  is  expressed  "  excellently  well." 

3.  The  latter  part  of  the  last  sentence  is  what  the  late 
Artemus  Ward  would  call  "a  little  mixed."  The  Act  is 
not  responsible  for  the  "  mixing  up  together,"  but  the 
bank  directors,  who,  like  the  Professor,  treat  the  notes 
issued  to  the  bank  (the  ^15,000,000)  as  issued  on  gold, 
and  those  held  in  the  Issue  Department  as  the  veritable 
notes  issued  on  securities.  There  should  be  no  dodging 
or  hocus-pocussing  in  a  matter  entirely  within  the  limits 
and  scope  of  scientific  demonstration.  The  facts  are  : 
First,  the  bank  has  all  its  share  capital  and  "rest"  in- 
vested in  government  securities.  Second,  it  has,  at  all 
times,  an  equal  amount  (^15,000,000)  of  notes  charged 
by  the  Issue  Department  against  it,  —  the  Banking  De- 
partment, —  on  account  of  the  securities  so  held  and 
credited  by  the  said  Issue  Department.  The  notes  so 
held  by  the  bank,  and  used  as  trading  reserve,  must, 
therefore,  "be  deemed  to  be  issued  on  securities  a/one;1' 
though  the  total  issues  are  declared  to  be  on  "  securities, 
coin,  and  bullion."  If  this  is  not  the  clear  logical  as 
well  as  legal  construction  of  the  Act,  "  its  framers  "  cer- 
tainly did  commit  "  the  exceedingly  unintelligent  blunder 
of  mixing  up  "  the  entire  business.  I  claim  they  did  not 
do  so,  but  that  the  bank  directors  are  in  error,  and  do 
not  comprehend  the  spirit  or  intent  of  the  Act,  or  the 
business  of  modern  banking. 

4.  But  how  can  Professor  Price's  declaration,  which  is 
logical  and  true,  that  "  the  gold  stored  and  kept  in  the 
Government  (the)  Issue  Department  in  no  sense  what- 
ever belongs  to  the  Bank  of  England,"  be  reconciled 
with  his  assertion,  on  the  next  page  of  his  work  (67), 
that,  "there  has  never  been,  since   1844,  the  slightest 


7  6  CURRENCY. 

tendency  of  a  run  upon  the  bank  for  a  single  one  of  the 
^15,000,000  of  notes,"  —  meaning,  of  course,  those 
always  charged  against  the  bank  on  account  of  securi- 
ties ?  He  might  as  well  have  said,  "  the  notes  held  by 
the  Bank  of  England,  as  a  banker,  are  notes  issued  on 
metal,  which  the  Issue  Department  holds  in  trust  for  the 
bank;  and  the  ^15,000,000  of  securities,  corresponding 
in  amount  with  the  notes  delivered  to  the  bank  in  addi- 
tion to  those  delivered  to  the  bank  on  coin  and  bullion, 
always  remain  in  the  Issue  Office,  and  are  there  held  as 
assets  when  all  the  metal  is  gone."  The  Professor  (as 
well  as  the  directors  of  the  bank,  who  are  ex  officio 
managers  of  the  Issue  Office)  must  accept  one  horn  or 
the  other  of  the  dilemma.  Let  them  choose  which  they 
like  best.  If  the  notes  held  by  "  the  Bank  of  England, 
as  a  banker,"  are  notes  issued  on  metal,  "  stored  and 
kept  in  the  Government  Office,"  it  is  a  breach  of  trust, 
and  a  fraud  on  the  public,  to  treat  them  as  "  reserve," 
and  demand  gold  for  them.  On  the  other  hand,  if  the 
^15,000,000  so  held  are  "to  be  deemed  (as  logically 
they  must  be)  to  be  "  the  notes  covered  by  the  securi- 
ties of  which  the  bank,  and  not  the  public,  is  the  owner, 
then  the  Bank  of  England  commits  an  equal  fraud  by 
drawing  metal  for  them  to  meet  calls  on  the  bank  itself 
for  such  metal. 

5.  The  present  theory  and  practice  of  the  bank  is 
only  a  bungling  juggle  that  ought  to  deceive  nobody.  I 
repeat,  though  the  entire  issue  of  notes  is  expressly  de- 
clared by  law  to  be  "  deemed  to  be  issued  on  securities, 
coin,  and  bullion,"  the  bank  treats  those  it  holds,  and 
which  it  gets  by  reason  of  securities  deposited,  as  trading 
reserve,  as  though  they  were  issued  on  metal  alone.  So 
far  as  the  Issue  Department  is  concerned,  this  is  not 
admissible.  Much  less  is  it  admissible  on  the  part  of 
the  bank,  which  is  bound  by  law  to  pay  metal  for  all  the 


PROFESSOR  BONAMY  PRICE  ON  THE  BANK  CHARTER.   77 

notes.     It  is  not  permissible  in  a  banker  to  "  blow  hot 
and  cold  "  at  the  same  time. 

6.  At  p.  68  Professor  Price  declares,  that,  "in  respect 
of  the  supposed  aims  of  its  promoters,  the  Bank  Act  must 
be  pronounced  a  failure."  In  this  view  and  in  much  of 
what  follows  I  cordially  agree,  because  the  facts  and  the 
principles  are  scientifically  correct.  But  I  cannot  see 
the  enormous  advantages,  stated  on  the  same  page,  as 
resulting  from  "a  saving  to  the  nation"  as  the  Professor 
erroneously  calls  it,  of  the  paltry  sum  of  ^15,000,000, 
by  issuing  to  the  bank  that  amount,  uncovered  by  metal. 
I  shall  show  conclusively  hereafter  (Chap.  XXVII.)  that 
gold  is  the  cheapest  money,  and  that  paper  founded  on 
the  same,  pound  for  pound,  is  the  best  paper  money  in 
the  world.  I  will  show  that  the  entire  metallic  money 
of  the  kingdom  only  costs  about  one  and  threepence  a 
head  per  annum  of  the  whole  population,  and  is  as  one 
to  fifteen  hundred  of  the  annual  productions  of  labor. 
The  saving  of  ^15,000,000,  all  told,  is  just  ten  shillings 
a  head  on  thirty  millions  of  people ;  and  the  interest  at 
four  per  cent  is  ^600,000,  equal  to  four  and  sixpence,  — 
four  and  six-tenths  of  a  penny  per  head  of  the  popula- 
tion. The  Scotch  are  said  to  have  made  fourpence  a 
head  by  selling  their  king.  Besides,  Great  Britain  thinks 
nothing  of  spending  twice  ^15,000,000  on  a  negro  war 
in  the  wilds  of  Africa. 

I  wish  I  could  quote  all  the  Professor  has  said,  so  well, 
in  favor  of  small  notes  issued  on  gold.  But  I  have  tried 
elsewhere  to  do  justice  to  this  subject  in  my  own  way. 

7.  At  p.  74  the  Professor  suggests  an  amendment  to 
the  Act  to  remove  the  Issue  Department  away  from  the 
bank's  premises,  to  Somerset  House  or  Whitehall,  and 
requiring  the  weekly  statement  of  the  issue  of  notes  and 
quantity  of  metal  to  be  published  separately  from  that  of 
the  bank's  affairs.     He  should  have  gone  farther,  and  in- 


78  CURRENCY. 

sisted  on  the  notes  being  made  payable  by  the  United 
Kingdom  of  Great  Britain  and  Ireland,  and  to  require 
the  bank  to  buy  what  notes  it  requires,  for  gold  coin  or 
bullion,  for  coinage,  pound  for  pound,  as  all  others  in  the 
kingdom  now  do.  In  this  case  the  state  notes  will  be 
good  banking  reserve,  —  "  as  good  as  gold." 

8.  I  hope  that  Professor  Price,  and  those  who,  like  him, 
are  willing  to  tolerate  the  present  British  system,  with  the 
slight  change  of  removing  the  issue  of  the  notes  to  some 
other  locality,  will  come  to  agree  with  me  that  the  bank 
note  is  at  the  bottom  of  all  airrency  disturbances. 
Whether  the  High  Court  of  Judicature,  if  the  case  were 
brought  before  it,  would  decide  that  the  notes  to  the 
amount  of  ^15,000,000  used  to  the  bank  for  its  own 
business  purposes,  are  issued  on  account  of  public  secu- 
rities, for  which  the  Issue  Department  ought  not  to  pay 
out  gold,  or  whether  the  bank,  like  any  other  holder, 
could  properly  demand  to  be  paid  in  metal,  matters  not. 
The  issue  I  make  with  the  system  is,  that  the  conduct  of 
the  bank,  and  of  all  bankers  and  merchants,  so  far  as 
such  conduct  is  influenced  by  the  present  system,  would 
be  very  different,  if  the  "  surgical  operation  "  I  insist  on 
were  made.  The  bank  then  will  recoup  its  capital  now 
invested  in  these  public  securities,  and  will  hold  metal  in 
their  place  for  its  reserve.  A  true  scientific  monetary 
system  will  turn  over  the  trade  in  metal  to  merchants  and 
bullion  dealers,  the  same  as  in  case  of  all  other  com- 
modities, and  effect  a  complete  separation  of  money  from 
finance. 

9.  I  have  now  only  further  to  ask  from  the  Professor, 
or  some  of  those  who  argue  as  he  does,  for  a  reconcilia- 
tion of  the  two  following  passages,  one  of  which  has 
before  been  quoted,  but  is  again  reproduced  for  com- 
parison. These  passages  occur  in  paragraphs  4  and  5, 
pp.  66  and  67,  of  his  work,  "  Currency  and  Banking." 


THEORY   AND   PRACTICE   OF  THE    DANK   OF   ENGLAND.     79 

i st,  "The  gold  stored  and  kept  in  the  Government 
Office,  the  Issue  Department,  in  no  sense  whatever  be- 
longs to  the  Bank  of  England.  It  is  no  part  of  the 
reserve." 

2d,  "  Gold,  no  doubt,  is  constantly  asked  for  at  the 
counters  of  the  bank ;  but  what  does  the  bank  do  ?  It 
sends  the  notes"  (notes,  mind,  which  constitute  a  part  of 
its  trading  "  reserve  ")  "  over  to  the  State  Office,  and  gets 
gold  for  them  at  once." 

If  the  gold  "  in  no  sense  whatever  belongs  to  the 
bank,"  how  dare  the  bank  "send  the  notes  over  to  the 
State  Office  and  get  gold  for  them  ?  "  Why  don't  some 
plucky  Englishman  have  the  managers  of  the  Issue  De- 
partment indicted  for  giving  the  fellows  across  the  hall 
gold  instead  of  securities?  The  case  is  a  serious  one. 
It  is  hardly  better  than  stealing.  It  is  a  penitentiary 
offence  to  use  trust-funds ;  and  here  it  goes  on  daily,  and 
on  a  huge  scale.  "  Ignorantia  non  excusat  legem."  The 
directors  are  warned  of  their  peril. 


CHAPTER  IX. 

THEORY   AND   PRACTICE   OF    THE    BANK    OF     ENGLAND    FUR- 
THER   CONSIDERED. 

i.  I  wish  to  remind  the  reader  that  I  am  discussing, 
analyzing,  and  applying  ascertained  principles  to  the 
practical  business  of  supplying  and  regulating  the  amount 
of  money,  metallic  and  paper,  to  the  demands  of  indus- 
try. The  Bank  of  England,  by  reason  of  its  great  capital, 
and  the  prestige  which  it  enjoys  and  in  part  derives  from 
the  sort  of  partnership  it  has  with  the  state,  has  become 
the  centre  of  the  whole  monetary,  if  not  financial,  system 
of  the  kingdom,  and,  in  a  manner,  of  the  world.     After 


So  CURRENCY. 

the  breaking  up  of  the  East  India  and  Hudson  Bay  com- 
panies, and  the  numerous  industrial  monopolies  fostered 
for  ages  by  state  protection,  we  have  the  conspicuous 
exceptional  example  of  this  one  great  bank,  sustained 
by  law,  and  often  by  the  direct  interposition  of  the  Gov- 
ernment, carrying  out  a  policy  utterly  at  variance  with 
sound  scientific  and  business  principles  and  with  the 
doctrines  of  free  trade. 

2.  A  careful  analysis  of  the  theory  and  practice  of  the 
bank  in  the  conduct  of  its  business  will  show  the  truth 
of  these  propositions.  An  extreme  sensitiveness,  and  lia- 
bility to  a  panicky  condition  of  trade,  has  become  a 
chronic  disease  in  the  British  industrial  system ;  and  very 
clear  evidence  exists  that  it  has  its  origin  in  the  practice 
of  the  bank,  in  respect  to  its  efforts  to  control  the  trade 
in  bullion  and  in  the  note  issue.  This  phenomenon  is 
nearly  unknown  in  France,  whose  great  National  Bank, 
with  a  much  smaller  proprietors'  stock,  holds  a  vastly 
larger  ratio  of  actual  cash  capital  to  its  instant  liabilities. 
This  circumstance  of  itself  affords  very  strong  evidence 
that  the  policy  of  continually  "  acting  on  the  exchanges," 
in  order  to  control  the  bullion  trade,  is  as  wrong  in  theory 
as  it  is  disastrous  in  practice.  The  theory  itself  is  so 
much  discussed  by  business  men,  and  is  so  well  under- 
stood from  long  observation  of  its  working,  that  the  great 
leading  houses,  bankers  and  others,  endeavor  to  predict 
what  the  bank  will  do  to-morrow,  next  day,  or  in  a  week, 
by  the  export  and  import  of  bullion.  All  are  watching 
with  the  utmost  care  the  increasing  or  diminishing  tons 
of  ingots  held  in  the  vaults  of  the  bank,  because  these 
constitute  the  barometer  to  the  exchanges  ;  and  all  specu- 
late in  their  minds  on  the  possibilities  and  probabilities 
of  the  immediate  future.  I  firmly  believe,  from  the 
actual  facts  I  have  mentioned,  that  the  only  cure  of  this 
diseased  state  of  the  monetary  and  financial  system  of 


THEORY   AND   PRACTICE   OF   THE    RANK   OF   ENGLAND.     8 1 

the  country  is  a  surgical  operation  which  will  sever  the 
present  relations  of  the  bank  from  national  financial  con- 
nection, and  the  issue  of  notes  on  coined  money  alone, 
whether  this  latter  be  done  by  the  bank  on  the  bank 
premises,  or  by  the  State  at  Whitehall.  As  I  observed  in 
the  last  chapter,  this  will  leave  the  trade  in  bullion  to 
those  who  make  a  specialty  of  it ;  and  it  will  then  sink 
to  the  level  in  importance  with  the  trade  in  other  great 
commodities,  such  as  cotton  and  corn  :  and  people  at 
large  will  not  grow  nervous  over  it. 

3.  Let  us  again  examine  the  facts  of  the  case  with  a 
little  more  explicitness,  without  going  into  historical  de- 
tails, which  it  is  presumed  the  reader  already  under- 
stands. 77/i?  bank  has  loaned  all  the  proprietors'  capital 
to  the  government,  amounting  to  some  £11,000,000,  for 
which  the  government  pays  the  usual  rate  of  interest, 
and  has  granted  to  the  bank  the  right  to  issue,  or,  more 
correctly  speaking,  to  receive  from  the  Issue  Department, 
a  full  equivalent  in  notes.  By  lodging  an  additional 
amount  of  government  securities,  now  making  a  total  of 
^15,000,000,  it  is  entitled  to  receive  that  amount  of 
notes ;  and  the  portion  of  this  sum  not  actually  passed 
beyond  the  walls  of  the  bank  constitute  its  reserve,  ex- 
cept a  small  amount  held  in  coin,  seldom  kept  up  to  a 
million.  This  plan  of  founding  a  note  issue  on  securi- 
ties uncovered  by  gold  or  silver  is  at  the  bottom  of  the 
whole  of  the  evils  of  the  British  and  American  monetary 
systems.  When  there  comes  a  call  for  bullion  for  ship- 
ment, or  coin  for  the  provinces,  the  portion  of  these 
unemployed  notes  held  as  reserve  is  drawn  upon  and 
presented  for  payment  in  gold,  and  the  store  of  gold 
diminishes  pari  passu  with  the  reduction  in  the  volume 
of  such  reserve.  With  the  influx  of  gold  into  the  vaults 
of  the  bank,  the  reverse  of  this  happens.  The  ratio  of 
reserve  to  liabilities  increases ;  and  a  certain,  not  exactly 


82  CURRENCY. 

defined,  ratio  between  the  reserve  of  notes  and  the  bank's 
liabilities  is  considered  healthy.  When  the  ratio  is  low- 
ered suddenly  and  considerably,  people  grow  alarmed, 
and  become  panicky,  because  it  foreshadows  a  rise  in 
the  rate  of  discount.  When  it  rises  above  the  usual,  or, 
what  is  considered  by  the  managers,  normal  condition 
(if  any  such  condition  can  be  considered  normal  in  a 
machine  subject  to  continual  artificial  regulation  and 
change),  then  low  rates  of  interest  prevail.  There  is  in 
such  cases  a  plethora  of  unemployed  capital,  which  by 
and  by  engenders  speculative  trading  and  careless  and 
generally  bad  investments.  These  are  the  conditions 
resulting  from  the  present  theory  and  practice  of  the 
bank. 

4.  By  way  of  illustration,  we  have  only  to  consider 
what  its  policy  would  be  if  the  bank  were  compelled  by 
law  to  act  on  a  different  theory  in  respect  to  its  business. 
Let  us  suppose  that  the  Bank  Act  has  been  amended  so 
as  to  embrace  a  clause  like  the  following,  the  rest  of  the 
Act  being  made  consistent  therewith  :  "  The  notes  issued 
on  public  securities  shall  not  be  legal  tender  in  payment 
of  public  or  private  debts,  and  shall  be  made  distin- 
guishable by  color  and  form  from  those  issued  in  pay- 
ment of  coin ;  and  the  notes  issued  on  government 
securities  shall  be  held  to  be  notes  of  the  said  Governor 
and  Company  of  the  Bank  of  England ;  and  those  issued 
in  payment  of  coin  shall  be  held  to  be  notes  issued  by 
the  State,  and  shall  be  made  payable  by  the  United 
Kingdom  of  Great  Britain  and  Ireland,  on  demand,  in 
lawful  gold  or  silver  coin,  according  to  the  requirements 
of  the  holder,  and  shall  be  legal  tender  everywhere  in 
said  United  Kingdom,  except  by  the  Issue  Department 
and  its  agencies." 

5.  The  notes  issued  by  the  state,  or  the  bank  directors 
as  a  board  of  issue  for  the  state,  would  then  be  good 


THEORY   AND   PRACTICE   OF   THE   DANK   OF   ENGLAND.    83 

cash  reserve  for  the  Bank  of  England,  or  any  banker  or 
merchant,  to  hold ;  but  it  would,  in  such  case,  be  equally 
clear  that  the  bank's  notes  issued  on  securities  would 
not,  in  the  bank's  own  hands,  be  so  considered  by  Mr. 
Hankey  or  any  other  authority  on  banking  or  trade. 
What  the  bank  would  be  compelled  to  do  in  this  situ- 
ation would  be  to  sell  its  notes  for  coin  ;  and  if  the  coin 
refused  to  stay,  and  its  notes  came  back  for  conversion 
too  quickly,  it  would  have  to  contract  the  issue,  and 
sell  a  portion  of  the  ^15,000,000  of  public  securities  to 
provide  adequate  reserve.  By  this  method  the  public 
would  plainly  perceive  the  true  position  of  the  paper- 
money  circulation,  and  the  managers  themselves  would 
know  the  exact  relations  of  the  two  principles  involved 
in  the  issue,  to  wit,  that  of  issuing  notes  on  securities 
and  on  metal.  Such  a  plan  would  be  equivalent  to  a 
mechanical  and  geographical  or  local  separation  of  the 
issue  from  the  business  of  the  bank.  The  illustration 
seems  to  make  the  question  intelligible  enough  for  the 
most  ordinary  business  man  to  comprehend. 

6.  Equally  clear  would  it  become,  under  such  an  alter- 
ation of  the  law,  that  the  holding  of  a  million  of  coin, 
or  cash  gold  and  silver,  would  not  be  a  safe  amount  for 
a  bank  to  hold  against  thirty  or  forty  million  pounds  of 
instant  or  comparatively  short  liabilities,  of  which  its  own 
notes  would  form  a  part,  when  in  the  hands  of  the  pub- 
lic. Such  "a  separation"  would  be  very  different  from 
the  present  statutory  separation.  The  "  mechanical  sepa- 
ration "  of  the  two  departments,  suggested  by  Mr.  Leon- 
ard Courtney,  M.P.,  in  his  article  in  the  "  Encyclopaedia 
Britannica,"  with  a  clause  in  the  Act  such  as  I  have 
quoted,  would  not  be  necessary  to  influence  the  con- 
duct of  other  bankers  and  city  men.  The  Bank  of  Eng- 
land might  still  manage  the  Issue  Department  without 
leading  to  confusion  of  thought  respecting  the  separa- 


84  CURRENCY. 

tion,  and  with  decided  advantage  to  business  interests, 
as  compared  with  the  present  plan ;  though  this  is  not 
the  plan  I  would  suggest. 

7.  The  analysis  of  the  principles  involved  in  the  pres- 
ent system  of  issuing  notes  and  treating  them  as  good 
banking  reserve  by  the  bank,  and  the  illustration  I  have 
given  of  a  system  that  forbids,  on  business  principles,  the 
regarding  and  treating  of  such  portion  of  the  notes  as 
reserve,  seem  to  me  to  be  demonstrative  of  the  errors 
that  underlie  the  whole  monetary  system  of  the  nation. 
The  fundamental  error  may  be  traced  to  the  misconcep- 
tion, by  the  managers,  of  the  power  they  possess  of  con- 
trolling the  volume  of  notes,  and  of  diminishing  and 
increasing  them  in  amount,  within  the  statutory  limit,  — 
at  present  ^15,000,000,  —  "as  occasion  may  require," 
or,  as  I  would  express  it,  according  to  the  law  of  sup- 
ply and  demand,  or  the  requirements  of  industry.  Mr. 
Hankey  truly  says  that  "the  more  the  conduct  of  the 
Bank  of  England  is  made  to  assimilate  to  the  conduct 
of  every  other  well-managed  bank  in  the  United  King- 
dom, the  better  for  the  bank,  and  the  better  for  the  pub- 
lic at  large." 

8.  Much  has  been  said  about  the  prudent  and  safe 
method  by  which  the  Bank  of  England  is  governed  in  the 
conduct  of  its  business,  and  the  handsome  profits  which 
result  from  such  prudence.  But  these  are  merits  in  no 
way  superior  to  those  to  which  a  large  number  of  im- 
portant joint-stock  and  private  banking  concerns,  as  well 
as  merchants,  are  equally  entitled  to  lay  claim ;  and  in 
the  matter  of  profit  to  the  proprietors,  there  are  scores 
of  such  banks  and  houses  which  pay  far  larger  dividends 
on  the  capital  invested.  When  it  is  considered  that  the 
Bank  pays  nothing  on  the  large  government  balances  it 
holds,  averaging  over  ^5,000,000,  and  the  trading  bal- 
ances of  joint-stock  and  numerous  mercantile  and  private 


THEORY   AND   PRACTICE   OF   THE   BANK   OF   ENGLAND.     85 

banking  houses,  while  other  bankers  pay  for  the  depos- 
itors' capital  they  trade  on,  there  is  not  much  for  the 
Bank  of  England  to  boast  of  in  the  matter  of  profit  to 
its  proprietors. 

9.  I  will  now  briefly  consider  the  claim  set  up  by  Mr. 
Hankey  and  the  Bank  of  England  managers  and  doctri- 
naires, that  the  bank  does  not  aim  to  "  make  the  rate 
of  discount  in  the  loan  market,"  when  it  raises  and  lowers 
its  own  rate,  but  only  seeks  to  "keep  in  the  market." 
If  this  were  true,  why  do  the  whole  of  this  class  of  expo- 
nents of  the  policy  of  the  bank  continually  speak  of  the 
necessity  or  desirability  of  "  acting  on  the  exchanges  "  by 
this  method  ?  This  is,  in  fact,  the  avowed  purpose  of  the 
bank  managers  in  cases  where  they  apprehend  a  large 
and  long-continued  withdrawal  of  bullion  for  shipment, 
when  they  run  the  rate  up  rapidly,  one  or  two  per  cent 
at  a  jump,  and  get  far  ahead  of  the  market  rate,  which 
follows  at  a  distance.  This  proceeding  is  "  making  the 
rate,"  or  it  is  nothing. 

10.  The  matter  of  fact  being  disposed  of,  it  is  com- 
petent for  a  writer  on  principles  to  inquire  into  the 
motives,  other  than  those  alleged,  for  the  practice,  and 
the  effect  of  the  practice  on  the  industries  of  the  people. 
Some  eminent  authorities,  with  much  show  of  justice, 
allege  that  the  bank  finds  its  advantage  in  playing  with 
the  rate  as  did  the  New  York  "  Rings "  of  speculators 
just  after  the  great  civil  war,  when,  by  a  powerful  com- 
bination, they  were  able  to  "  lock  up  "  so  large  an  amount 
of  capital  for  a  time,  as  to  cause  a  heavy  fall  in  the  price 
of  securities  in  the  market,  which  the  Ring  then  bought 
up,  and  was  able  to  sell  at  a  handsome  profit,  when  they 
set  the  "locked-up"  capital  afloat.  It  is  alleged,  and  I 
am  assured  by  high  authority,  that  the  bank  certainly 
does  take  advantage  of  the  fall  in  public  and  other 
securities  caused  by  its  own  acts,  to  make  heavy  pur- 


S6  CURRENCY. 

chases.  The  practice  in  New  York  became  so  conspicu- 
ous, that  it  at  length  led  to  the  passage  of  an  Act  of  Con- 
gress making  such  practices  misdemeanors,  punishable 
by  fine  and  imprisonment ;  since  which  time  the  practice 
of  "  raising  the  rate  "  by  such  means  has  altogether  ceased. 
But  whether  such  mercenary  motives  lie  at  the  root  of  the 
practice  of  the  Bank  of  England  in  thus  "  acting  on  the 
exchanges,"  on  the  pretext  of  preventing  the  undue  out- 
flow of  bullion,  or  not,  its  injurious  effects  on  industrial 
pursuits  cannot  be  doubted. 

1 1 .  The  sudden  raising  and  lowering  of  the  rate  of  dis- 
count, or  the  price  paid  for  capital  in  the  loan  market, 
whether  effected  by  the  Bank  of  England,  or  by  other 
artificial  combinations  of  capitalists,  has  the  same  effect 
as  the  rapid  fluctuations  in  an  irredeemable  paper  cur- 
rency. It  strikes  directly  at  the  natural  regulator  of 
values,  supply  and  demand,  and  unhinges  all  business 
plans.  It  is  the  same  in  its  effects  on  values,  as  the  per- 
petual "  tinkering  "  with  customs  and  excise  duties.  Pru- 
dent merchants  and  manufacturers  look  six  to  twelve 
months  ahead  for  their  supplies  in  trade  and  business. 
They  make  bargains  for  the  future  ;  and  hence  it  is  of  the 
utmost  importance  to  general  trade  that  there  should  be 
no  means  at  the  sole  disposal  of  any  financial  institution, 
or  body  of  capitalists,  capable  of  causing  sudden  changes 
in  the  price  of  capital,  because  the  price  paid  for  goods 
must  depend  on  the  rate  of  interest.  Nothing  is  clearer 
than  this  principle,  that  the  price  of  capital  invested  in 
trade  and  all  industrial  pursuits,  as  well  as  of  wages,  forms 
a  large  proportion  of  one  side  of  the  equation  of  supply 
and  demand  ;  and  hence  all  artificial  disturbances  of  such 
price,  or,  let  us  call  it,  market  value,  are  contrary  to 
public  policy,  and  ought  to  be  counteracted,  and  not 
sustained  by  law. 

12.  The  "acting  on  the  exchanges"  by  the  bank  is 


THEORY   AND   PRACTICE   OF   THE    BANK   OF   ENGLAND.      S7 

the  same  as  if  Parliament  were  to  place  the  power  in  the 
hands  of  a  great  corporation,  to  impose  export  and  import 
duties  on  all  the  products  of  industry  entering  into  home 
and  foreign  trade  ;  and  this  body,  or  corporation,  for  its 
own  purposes,  kept  perpetually  increasing  and  dimin- 
ishing such  duties.  This  will  appear  perfectly  clear  if  we 
consider,  that  when  the  bank  succeeds,  as  it  often  has 
done,  in  raising  the  market  rate  of  interest  in  a  few  days 
or  weeks,  five,  six,  or  more  per  cent,  and  then  again  in 
lowering  it  in  a  similar  way,  the  merchant  must  take  the 
effect  into  account  in  making  his  bargains.  The  rise  so 
caused  is  exactly  the  same  as  a  tax  imposed  by  the  state, 
for  the  time  being,  on  all  the  trading  capital  of  the  coun- 
try. Such  a  tax,  if  made  permanent,  and  not  unduly 
high,  would  soon  become  normal ;  and  all  business  would 
adjust  itself  to  it,  and  no  great  evil  would  ensue.  But 
when  the  bank  imposes  it,  no  one  can  say  exactly  how 
long  it  will  last,  or  how  high  or  how  low  it  will  go.  In 
this  matter  the  Bank  of  England  has  a  most  decided 
advantage  over  other  discount  houses  and  all  traders,  in 
being  able  to  profit  by  its  own  secret  acts  and  plans.  It 
is  a  large  dealer  in  first-class  railway,  as  well  as  public, 
securities  of  foreign  countries  and  consuls,  all  of  which 
are  easily  influenced  in  market  value  by  the  practice  in 
question  (note  III.). 

13.  If  the  bank  would  avoid  these  imputations,  it 
should  change  its  policy  of  making  a  flourish  of  the  rate 
before  the  world,  and  move  on  quietly  with  and.  in  the 
market.  If  its  stock  of  gold  is  slipping  away  too  fast 
for  its  resources,  the  true  and  natural  method  is  to  cur- 
tail its  note  issue  by  diminishing  its  securities  in  the 
Issue  Department,  and  converting  them  into  gold  coin. 

14.  It  is  evident  from  what  Mr.  Hankey  says  in  his 
treatise  on  Banking,  that  the  bank  is  losing  its  hold  on 
the  market.     He  says,  "  It  has  very  frequently  occurred, 


83  CURRENCY. 

that  after  a  very  long  succession  of  very  low  rates  of 
interest,  indicated  by  a  great  abundance  of  unemployed 
capital,  an  extent  of  business  has  been  undertaken,  far 
beyond  what  a  judicious  regard  to  safety  should  have 
induced  :  and  if,  when  this  state  of  things  is  in  existence, 
any  sudden  apprehension  of  an  approaching  scarcity 
should  occur,  no  rise  in  the  rate  of  discount  will  imme- 
diately check  the  demand ;  on  the  contrary,  the  very 
opposite  effect  may  be  produced."  Mr.  Hankey  has  un- 
wittingly laid  down  the  natural  law  in  respect  to  such 
spasmodic  and  artificial  attempts  to  influence  the  price 
of  capital.  But  he  has  simply,  like  the  bank  managers, 
mistaken  the  cause  for  the  effect. 

15.  If,  in  such  cases  as  Mr.  Hankey  specifies,  the 
object  of  raising  the  rate  is  to  operate  against  the 
tendency  of  the  market  towards  a  temporary  adverse 
condition  of  the  foreign  exchanges,  and  thus  to  stay  the 
export  of  bullion,  the  effort  will  be  abortive,  unless  the 
bank  succeeds  in  carrying  the  market  rate  up  with  its 
own,  which  it  now  frequently  fails  to  accomplish,  for  the 
simple  reason  that  those  who  find  a  profit  in  shipping 
bullion  always  buy  it,  or  raise  their  capital  to  buy  it,  at 
the  lowest,  and  not  the  highest,  or  bank  rate,  and  because 
the  market  is  getting  too  large  to  be  influenced  in  this 
way. 

16.  From  what  has  been  said,  it  must  be  inferred  that 
the  bank,  to  the  extent  of  its  power,  perpetually  in- 
fringes or  contravenes  the  great  fundamental  principles 
of  free  trade  and  the  free  action  of  the  natural  laws. 
Professor  Bonamy  Price,  in  a  series  of  well-written  arti- 
cles published  in  "The  Daily  News,"  in  December,  1875, 
pointed  out  the  fatuity  of  the  bank  policy,  in  respect  to 
the  playing  with  the  rate,  because  a  few  tons,  more  or 
less,  of  metal  had  been  called  for  by  foreign  dealers,  and 
for  use  in  the  Provinces.    My  own  impressions  up  to  that 


THE   THEORY   OF   ACTING   ON  THE   EXCHANGES.  89 

time  had  been,  that,  in  this  matter,  the  bank  directors 
were  simply  acting  in  ignorance  of  the  principles  of 
monetary  and  industrial  science,  and  not  with  the  view 
of  profit.  I  shall  devote  another  chapter  to  this  subject 
in  order  to  consider  the  plan  suggested  by  Mr.  Ernst 
Seyd,  a  German  actuary,  and  statistician  of  great  research 
and  ability,  who  writes  well  from  those  stand-points.  It 
will  be  seen  by  those  who  have  examined  Mr.  Seyd's 
ingenious  and  practical  method  of  treating  the  issue  of 
notes  by  the  bank,  that  he  has  reached  by  actuarial  logic 
the  same  conclusions,  respecting  the  error  of  the  theory 
and  practice  of  the  bank,  that  I  have  done  by  deduction 
and  inference,  or  strictly  logical  methods. 


CHAPTER  X. 


FALLACY  OF  THE  THEORY  OF  "  ACTING   ON   THE  EXCHANGES 

BY    THE     BANK     OF     ENGLAND. VIEWS    OF     MR.     ERNST 

SEYD. 

i.  Mr.  Ernst  Seyd,  mentioned  at  the  close  of  the 
last  chapter,  who  has  studied  the  whole  subject  of  the 
Bank  of  England  theory  and  practice  from  a  strictly 
actuarial  stand-point,  and  has  published  two  works  on 
"The  Error  of  the  Bank  of  England  Note  Issue,"  has, 
since  the  last  two  chapters  were  (May,  1876)  mostly 
written,  kindly  favored  me  with  his  views  in  writing,  and 
a  copy  of  his  printed  work  last  issued.  These  works 
embrace  a  large  amount  of  statistical  information,  on  the 
entire  subject  of  money  circulation  in  Europe  and  Amer- 
ica, of  much  interest.  He  has  noticed  the  circumstance, 
dwelt  on  by  me  in  Chap.  VII.,  that  the  bank  has  always 
kept  what  he  calls  "  the  fiduciary  issue  "  of  notes  pre- 
dicated on  government  securities  at  its  "  maximum,"  and 


90  CURRENCY. 

hence  has  failed  to  meet  the  clear  intent  of  the  Act  of 
1844.  His  reasoning  on  the  failure  of  the  bank  to 
regulate  its  note  issue,  within  the  statutory  limit,  by  low- 
ering and  raising  the  amount  of  notes,  in  order  to  give 
the  elasticity  necessary  to  meet  the  natural  laws  of  indus- 
try, or  to  measure  out  supply  in  conformity  with  demand, 
is  unanswerable.  He  has  made  up  numerous  theoretical 
bank  statements  showing  how,  by  first  diminishing,  and 
then  raising,  within  the  prescribed  limits,  the  amount  of 
securities  held  against  notes  issued  to  the  Banking 
Department,  and  therewith  pari  passu,  the  volume  of 
such  notes  held  as  reserve  would  meet  the  ebb  and  flow 
of  supply  and  demand. 

2.  This  is  simply  another  method  of  proving  that  the 
bank  acts  on  a  fundamental  error  in  treating  its  notes 
issued  on  securities  as  banking  reserve  ;  for,  if  the  bank 
does  not  hold  a  reserve  of  notes  on  Mr.  Seyd's  theory, 
it  must  supply  their  place  by  selling  the  securities  and 
holding  coin  as  a  reserve.  The  full  title  of  the  last 
work  of  Mr.  Seyd,  now  before  me,  is  "  Statement  of 
Accounts  showing  and  illustrating  the  Error  of  the 
Practice  in  the  Note  Issue  of  the  Bank  of  England." 
Not  the  least  important  fact,  dwelt  on  by  Mr.  Seyd  with 
much  emphasis,  is,  that  the  bank  keeps  its  surplus  funds 
invested  in  long  securities.  As  these  funds  are  bor- 
rowed, and  constitute  instant  liabilities,  being  depositors' 
capital,  it  proves  by  Mr.  Hankey's  argument,  already 
quoted  in  Chap.  VII.,  that  the  Bank  of  England  totally 
disregards  what  other  bankers  consider  sound  banking. 
What  Mr.  Seyd  urges  is,  that  the  bank  ought  to  engage 
more  extensively  in  discounting  short  commercial  paper, 
out  of  which  he  claims  it  would  make  a  large  profit  for 
its  stockholders  by  getting  compound  interest.  He  also 
points  out  the  risk  always  attending  long  investments 
made  from  borrowed  capital,  which  may  be  called  for  at 


THE   THEORY   OF  ACTING   ON   THE   EXCHANGES.  9 1 

any  moment,  when  such  securities  may  have  fallen  in 
market  value  by  reason  of  crises.  The  bank  statements 
should  be  so  made  up  as  to  show  to  what  extent  it  is  a 
dealer  in  debentures  and  other  long  securities,  in  order 
to  enable  the  public  to  form  a  more  correct  idea  of  its 
financial  position  from  week  to  week,  and  of  its  probable 
course  in  regard  to  the  rate.  The  words,  "  other  securi- 
ties," are  by  far  too  indefinite  to  be  of  any  value  for 
such  purpose.  There  is  nothing  like  short  commercial 
paper  based  on  goods  for  availability  as  banking  assets. 
In  so  far  as  Mr.  Seyd  has  laid  stress  on  this  error  of  the 
bank,  which  is  fundamental  in  banking  business,  I  agree 
with  him. 

3.  I  have  already  remarked  on  the  fallacious  plan  of 
having  the  entire  proprietors'  capital  locked  up  in  per- 
petual government  securities,  and  then  relying  wholly  on 
borrowed  capital  to  trade  on.  If,  in  addition  to  this 
fundamentally  wrong  system  of  banking,  a  large  part  of 
depositors'  capital  which  the  bank  has  borrowed  is  in- 
vested in  long  securities,  liable  to  wide  fluctuations  in 
market  value,  it  is  no  wonder  the  intervention  of  Govern- 
ment is  so  frequently  invoked  to  save  it  from  making 
disastrous  losses  or  being-  compelled  to  suspend  payment. 
I  appeal  to  the  judgment  of  British  statesmen  and  econ- 
omists, and  to  the  common  sense  of  the  people,  whether 
such  a  system  ought  to  be  tolerated  in  the  present  ad- 
vanced stage  of  commercial  intelligence.  If  the  practice 
of  allowing  the  Bank  of  England  to  suspend  in  order  to 
save  it  from  making  sacrifices  to  maintain  its  solvency  is 
a  part  of  the  system,  it  should  be  made  applicable  to  all 
other  joint-stock  banks.  "  What's  sauce  for  the  goose  is 
sauce  for  the  gander." 

4.  If  other  large  banking  concerns  would  agree  to 
abandon  the  practice  of  holding  a  large  proportion  of 
their  trading  balances  or  margins  on  deposit  at  tone  bank, 


Q2  CURRENCY. 

and  retain  them  in  their  own  vaults,  it  would  probably 
have  a  beneficial  effect  on  the  loan  market  in  cases  of  a 
panicky  feeling  threatening  a  crisis  ;  and  the  bank  would 
then,  probably,  not  have  so  frequently  to  pray  to  Her- 
cules for  assistance,  and  the  trade  in  debentures  would 
be  left  to  syndicates  and  debenture  companies.  It  is  very 
obvious  that  no  part  of  a  banker's  trading  capital,  much 
less  the  capital  of  depositors,  held  on  call,  or  at  short 
notice,  can,  with  propriety,  be  invested  in  such  long 
securities  as  are  liable  to  extensive  fluctuations,  or  even 
consols,  which  sometimes  fall  many  points  in  a  few  days, 
as  just  prior  to  the  Russian  war  in  1854.  As  Mr.  Han- 
key  has  put  it,  "  promises  to  pay  at  a  future  date  "  cannot 
be  made  to  take  the  place  of  "  a  supply  of  ready  money." 

5.  Should  Sir  Robert  Peel's  provision  in  the  law  of 
1 844,  for  giving  to  the  Bank  of  England  the  whole  of 
the  lapsing  country  bank  note  circulation,  be  expedited, 
as  intimated  by  the  present  Chancellor  of  the  Exchequer, 
the  evils  of  the  bank's  fallacious  and  mischievous  policy 
will  be  aggravated  to  exactly  the  extent  of  such  increase 
in  the  volume  of  notes  issued  on  securities.  If,  instead 
of  the  present  "fiduciary  issue"  of  ^15,000,000,  the 
limit  be  raised  to  ^30,000,000,  .and  the  present  practice 
of  keeping  the  whole  in  circulation  (for  I  hold  with  Mr. 
Courtney  that  all  "  held  in  reserve  in  the  bank  are  as 
much  in  circulation  as  if  they  were  in  the  tills  and  pockets 
of  the  people"),  it  is  easy  to  see  how  enormously  the 
already  great  sensitiveness  of  the  market  will  be  in- 
creased. 

6.  If  the  bank  would  change  its  policy  so  as  to  make 
it  conform  to  the  illustrations  of  Mr.  Seyd,  that  is,  avail- 
ing itself  of  the  provision  of  the  law  to  lower  and  raise 
the  amount  of  notes  issued  on  securities,  such  a  calami- 
tous state  of  things  would  be  averted,  in  case  the  threat 
of  Sir  Stratford  Northcote  be  carried  out,  to  give  full 


THE   THEORY   OF   ACTING   ON   THE    EXCHANGES.  93 

scope  to  Sir  Robert  Peel's  intentions  about  the  country, 
Irish,  and  Scotch  banks'  circulation.  A  very  little  con- 
sideration will  show  the  desirability  of  the  suggested 
alteration  in  policy.  The  metallic  circulation  of  the 
country  is  a  fixed  amount,  or  nearly  so,  and  is  wanting  in 
some  degree  the  greater  elasticity  of  a  convertible  paper 
money  system.  The  gold  coin  is  not  subject  in  the  same 
degree  to  the  influences  of  supply  and  demand,  which 
cause  gold  bullion,  as  a  commodity,  or  raw  material,  to 
be  sent  abroad,  and  hence  possesses  less  elasticity  than 
the  commodity  which  has  the  whole  world  for  a  market. 
Add  to  this  circumstance  the  fact  that  the  bank  keeps  its 
"fiduciary  notes"  always  at  the  maximum  allowed  by 
law,  it  will  be  seen  how  many  elements  of  a  perfect  mon- 
etary system  are  deficient. 

7.  Mr.  Seyd  inferentially,  if  not  directly,  treats  the 
reserve  of  notes  as  Mr.  Courtney  and  I  do,  as,  in  princi- 
ple, the  same  as  though  they  were  floating  about  outside 
the  walls  of  the  bank.  The  very  fact  that  they  are 
treated  by  the  bank  as  trading  or  banking  reserve,  though 
erroneously,  proves  the  correctness  of  this  method  of 
regarding  such  notes.  They  are  held  to  meet  immediate 
calls  for  cash,  just  as  those  held  by  other  bankers  and 
merchants,  and,  in  the  absence  of  coin,  are  just  as  neces- 
sary to  the  Bank  of  England  as  to  any  other  bank,  so  far 
as  the  demand  for  notes  is  concerned.  The  bank,  how- 
ever, treats  all  the  notes  given  out  by  the  Issue  Depart- 
ment as  cash  liabilities  against  that  department  and  not 
as  against  itself.  In  essence  and  in  principle  the  issue 
of  notes  on  securities  is  a  method  whereby  a  man  can 
own  a  good  investment  and  possess  himself  of  its  value 
in  money,  which  is  an  absurdity  (postulates  52,  53). 

8.  One  of  the  best  reasoned-out  portions  of  Mr. 
Seyd's  work  is  where  he  shows  the  fallacy  of  the  theory 
of  using  the  "  rate  "  to  act  on  the  exchanges,  in  order  to 


94 


CURRENCY 


influence  the  trade  in  bullion,  instead  of  making  the  note 
issue  do  that  work  by  the  means  indicated,  and  allowing 
the  trade  to  be  governed  by  supply  and  demand.  He 
points  out,  and  illustrates  by  statements,  how  the  bank  first 
raises  its  rate  above  the  market,  or  natural  rate,  to  attract 
a  large  supply  of  bullion,  and  then,  when  this  end  is 
attained,  or  the  outflow  has  been  arrested,  runs  the  rate 
down,  often  as  low  as  two  per  cent,  in  order  to  drive 
it  away  again,  thus  causing  the  utmost  inconvenience  to 
all  industries  requiring  steady  rather  than  high  or  low 
rates  of  interest.  Mr.  Seyd's  words  are,  "  It  is  painful, 
because  it  would  seem  a  pity,  that,  after  having  made 
great  efforts  to  recover  bullion  and  set  the  issue  right,  we 
should  immediately  afterwards  make  efforts  to  drive  it 
away  again.  It  is  uncertain,  because,  though  we  know 
that  the  process  adopted  must  take  bullion  away,  yet  we 
cannot  control  or  check  its  effect  without  occasional  jerks 
upwards  of  our  rates." 

9.  While  I  fully  agree  with  Mr.  Seyd,  as  well  as  Mr. 
Bonamy  Price,  about  the  impolicy  of  acting  on  the  outgo 
and  inflow  of  bullion,  by  playing  with  the  rate  like  chil- 
dren playing  at  shuttlecock,  I  propose  a  more  complete 
and  scientific,  as  well  as  practical,  remedy.  Mr.  Seyd's 
reforms  are  limited  to  the  raising  and  lowering,  within  the 
legal  limit,  the  amount  of  fiduciary  notes ;  whilst  I  insist 
on  removing  the  issue  wholly  from  the  Bank  of  England, 
and  all  other  banks  in  the  kingdom.  But  I  concede  to 
Mr.  Seyd,  as  well  as  to  Mr.  Price,  that  they  have  con- 
clusively demonstrated  the  fallacy  of  the  theory  of  "  act- 
ing on  the  exchanges,"  which  should  be  left  severely 
alone,  to  be  regulated  by  the  only  true,  equable,  and 
natural  regulator,  the  demand  of  the  world  for  all  com- 
modities, bullion  and  money  included,  on  the  one  hand, 
and  the  market  supply  of  these  on  the  other. 

10.  After  Mr.  Seyd's  elaborate  exposition  of  the  true 


THE   THEORY   OF  ACTING   ON  THE   EXCHANGES.  95 

intent  and  meaning  of  the  law,  in  respect  to  the  power 
of  the  bank  to  diminish  and  increase  the  issue  of  notes, 
Mr.  Hankey's  assertion,  that,  "  since  the  passage  of  the 
Act,  the  bank  has  had  no  control  over  the  volume  of  the 
note  issue,"  seems  utterly  inexplicable.  The  limits  within 
which  the  bank  possesses  this  power  absolutely  in  its 
hands,  is  equal  to  the  whole  fiduciary  issue  of  ^15,000,- 
000,  —  a  pretty  wide  range  in  the  present  scope  of  indus- 
try and  general  trade.  Perhaps,  half  a  century  hence, 
when  the  business  of  the  country  shall  have  trebled  or 
quadrupled,  a  larger  amount  to  operate  on  may  be 
necessary. 

1 1 .  While  conceding  so  much  to  Mr.  Seyd's  exposition 
of  the  fallacy  of  the  traditional  policy  of  the  Bank  of  Eng- 
land, I  shall  have  to  take  exception,  in  a  future  chapter, 
to  a  theory  he  has  attempted  to  set  up  for  the  regulation 
of  interest.  He  has  published  a  work  on  this  subject, 
entitled  "A  More  Perfect  Working  System  between  Bul- 
lion and  Interest."  From  a  glance  over  it,  I  reached  the 
conclusion  that  it  was  simply  a  new  version  of  the  old 
Mercantile  Theory.  Mr.  Seyd  proposes  artificial  methods 
of  regulating  the  rate  of  interest,  all  and  sundry  of  which 
are  fundamentally  wrong ;  as  the  natural  laws  only  can 
properly  regulate  the  market  value  of  capital  and  all  other 
things.  The  English  law  of  "  Let  alone,"  and  the  Ameri- 
can of  "  Masterly  inactivity,"  express  the  exact  idea  of 
what  is  the  best  method  of  regulating  the  rate  of  interest, 
and  all  kinds  of  industries. 

12.  I  will  only  observe,  on  the  subject  of  this  proposal 
to  establish  "  a  more  perfect  working  system  between 
bullion  and  interest,"  that  it  is  impracticable,  and  at  vari- 
ance with  the  true  principles  of  trade  and  industry,  which 
thrive  best  when  left  to  the  competition  of  all  the  world. 
Bullion  is  simply  a  commodity,  of  no  more  importance  in 
the  industrial  system  than  any  other  equal  in  the  amount 


96  CURRENCY. 

in  which  it  is  dealt  in,  and  exercises  no  more  influence 
on  interest  than  cotton,  in  proportion  to  their  respective 
values.  It  is  simply  a  question  of  values,  when  we  come 
to  inquire  into  the  relative  influences  of  commodities. 
Each  one  contributes  its  quota  to  the  great  ocean  of  float- 
ing capital,  or  trading  power,  which  regulates  all  values, 
and  differentiates  the  exact  proportion  contributed  by 
each  commodity.  In  this  ocean,  gold  and  silver  float  on 
the  same  level,  so  to  speak,  as  wheat,  corn,  and  cotton ; 
and  iron,  lead,  and  cotton  become  as  light  as  feathers  or 
cork.  Is  it  not,  therefore,  a  sheer  waste  of  time  to  set 
up  pretensions  in  favor  of  the  "  precious  metals,"  which 
are  no  more  precious,  in  the  vast  aggregation  of  things 
having  market  value,  than  any  article  for  which  they  are 
exchanged  ? 

13.  I  do  not  wish  to  raise  side  issues  as  to  the  motives 
of  the  managers  of  the  Bank  of  England  in  playing  with 
the  rate.  The  alleged  reasons  for  "acting  on  the  ex- 
changes," and  influencing  the  trade  in  bullion,  are  suffi- 
cient to  sustain  the  basis  of  reasoning  I  have  adopted  in 
order  to  demonstrate  its  fallacy.  In  a  subsequent  chap- 
ter I  shall  specially  treat  of  the  subject  of  bullion,  and 
point  out  very  clearly  the  difference  in  the  uses  and  prin- 
ciples of  bullion  and  of  coined  money,  —  the  raw  material 
and  the  manufactured  article. 


CHAPTER   XI. 

MONEY  AND  BULLION.  —  WRONG  THEORIES  RESPECTING  THEM. 

i.  I  pointed  out,  incidentally,  at  the  conclusion  of  the 
last  chapter,  the  circumstance  that  the  precious  metals 
constitute  only  one  of  the  factors,  some  more  and  some 
less  influential,  which  make  up  in  the  commercial  world 


MONEY    AND    BULLION.  97 

the  great,  ever-balancing,  but  never  quite  balanced,  sheet 
of  human  industries.  I  also  pointed  out  the  self-evident 
fact,  that  the  trading  power  of  these  metals  differs  in  no 
way  from  that  of  other  commodities,  and  was  simply  in 
the  ratio  of  their  gross  market  values.  I  now  propose  to 
show  and  prove  the  scientific  and  practical  difference 
between  money,  the  manufactured  article,  and  bullion,  the 
raw  material. 

2.  It  has  been  the  practice  of  some  of  the  best  writers 
on  economic  science,  from  Adam  Smith  to  the  present 
time,  including  Mill  and  McCulloch,  and  especially  of 
City  authorities,1  et  hoc  genus  omnia,  to  confound  money 
with  bullion,  or  at  least  not  to  distinguish  between  them. 
Adam  Smith  says,  "  Money  is  a  commodity  with  regard 
to  which  every  man  is  a  merchant.  Nobody  buys  it,  but 
in  order  to  sell  it  again ;  and,  in  regard  to  it,  in  ordinary 
cases,  there  is  no  last  purchaser."  Mr.  Mill  observes, 
"  Money  is  brought  into  a  country  in  two  ways.  It  is 
imported  (chiefly  in  the  form  of  bullion)  like  any  other 
merchandise,  as  being  an  advantageous  article  of  com- 
merce. It  is  also  imported  in  its  other  character  as  a 
medium  of  exchange  to  pay  some  debt."  ("Elements  of 
Political  Economy.")  The  distinction  here  made  between 
the  two  methods  of  bringing  money  "into  a  country" 
is  one  without  a  difference ;  but  my  object  in  citing  the 
passage  is  to  show  that  he  treats  bullion  and  money  as  one 
and  the  same  thing.  He  next  says,  in  express  words,  "  I 
shall  use  the  term,  money,  and  precious  metals,  indis- 
criminately." But,  in  another  sentence,  he  speaks  more 
accurately,  when  he  says,  "  in  so  far  as  the  precious 
metals  are  imported  in  the  ordinary  way  of  commerce, 
their  value  must  depend  on  the  same  laws  as  the  value 

1  For  the  information  of  American  readers,  I  would  explain,  that,  by  "  The 
City  "  is  always  meant  that  part  of  London  in  near  proximity  to  the  Bank  of  Eng- 
land, where  the  chief  financial  affairs  are  conducted. 


98  CURRENCY. 

of  any  other  foreign  production."  The  distinction  will 
be  apparent,  by  referring  to  the  causes  I  have  already 
stated,  which  give  to  money  other  elements  of  market 
value,  such  as  being  legal  tender,  and  the  supply  of  the 
article,  money,  as  distinguished  from  the  articles,  "precious 
metals."  Having  approached  so  near  the  rationale  of  the 
matter,  it  is  surprising  so  good  a  reasoner  should  have 
failed  to  grasp  the  entire  problem  requiring  solution. 

3.  The  obvious  distinction,  both  scientific  and  practi- 
cal, between  the  two,  consists  in  the  circumstance,  that 
the  commodity,  bullion,  must  first  undergo  the  process 
of  coinage,  or  manufacture,  and  be  made  legal  tender, 
before  it  becomes  money.  The  precious  metals,  in  their 
two  conditions  of  money  and  bullion,  bear  about  the 
same  relations  to  each  other  as  the  chrysalis  bears  to  the 
butterfly.  Bullion  is  the  sluggish  chrysalis,  and  money 
the  full-fledged  and  lively  butterfly,  swift  of  motion  and 
lovely  to  look  upon.  The  comparison  may  be  a  little  po- 
etical ;  but,  literally  speaking,  money  almost  flies,  so  won- 
derful are  its  powers  of  circulation  :  while  bullion  lies 
hoarded  and  immobile  in  the  dark  vaults  of  brokers, 
bankers,  and  merchants,  and  is  moved  only  as  a  com- 
modity. 

4.  Perhaps,  however,  the  most  striking  distinction  be- 
tween money  and  bullion  consists  in  the  former  being 
a  graduated  implement,  like  a  yard-measure,  by  which  we 
are  enabled  to  measure  the  values  of  other  things,  and 
mete  out,  by  the  scale  of  denominations,  trading  power. 
The  stamp  of  the  state  guarantees  the  fineness  of  the 
metal,  and  the  divisions  and  multiples  of  the  unit  of 
value  of  the  various  denominations  completes  the  com- 
parison with  the  yard-measure.  All  these  differing  condi- 
tions serve  to  take  money  out  of  the  ordinary  category 
of  commodities,  to  which  the  precious  metals  in  the  form 
of  bullion  belong.      The  pound,  the   shilling,  and   the 


MONEY   AND   BULLION.  99 

penny,  or  the  dollar  or  franc,  and  the  centum,  complete 
the  scale  of  measure  of  coined  money.  The  reasoner 
who  grasps  this  distinction  will  perceive  at  a  glance,  that 
a  lump,  or  nugget,  of  gold  does  not  act  as  an  implement 
in  the  same  manner  or  serve  the  purpose  of  a  sovereign 
or  a  dollar.  The  nugget  itself  must  be  weighed,  and  its 
value  determined. 

5.  Under  a  universal  monetary  system,  such  as  I  have 
outlined  in  Chap.  XXV.,  there  would  be  provided  a  per- 
fect natural  regulator  of  the  supply  of  money  ;  and  each 
nation  would  coin  only  so  much  as  was  required,  and  the 
aggregate  supply  of  coin  would  distribute  itself  throughout 
the  world.  In  other  words,  no  more  bullion  would  be 
offered  for  sale  at  the  respective  mints,  than  would  afford 
a  profit  by  being  turned  into  money,  and  the  latter  would 
seldom  be  meted. 

6.  I  have  made  this  critical  distinction,  and  elaborated 
it,  in  order  to  strike  down  the  erroneous  practice  of 
writers  of  money  articles,  as  well  as  economists  and 
public  men,  of  confounding  the  principles  and  uses  of 
money  with  those  of  bullion.  There  is,  in  fact,  just  as 
wide  a  difference  in  principle  between  the  two,  as  between 
money  and  corn,  or  cotton  ;  and  they  cannot,  without 
great  and  utter  confusion  of  ideas,  be  treated,  as  Mr. 
Mill  treats  them,  "  indiscriminately  "  or  as  synonymous. 
A  bale  of  cotton  is  just  as  much  money  as  a  nugget  of 
gold  of  equal  value ;  and  the  corn  market  may  just  as 
appropriately,  in  principle,  be  called  the  "  money  market " 
as  the  bullion  market  may  be  so  called.  There  will  be  no 
possibility  of  establishing  just  and  true  scientific  princi- 
ples in  monetary  science  till  these  distinctions  are  recog- 
nized. It  is  simply  the  same  thing  as  confounding  money 
with  capital,  which  I  have  already  spoken  of  in  my  re- 
marks on  capital. 

7.  The  habit  of  confounding  money,  the  measure  of 


I OO  CURRENCY. 

values,  with  bullion,  the  raw  material,  or  the  sluggish 
chrysalis  with  the  gorgeous  and  nimble  butterfly,  must  be 
got  rid  of  entirely.1 

8.  Mr.  Mill  has  fallen  into  another  most  palpable  error 
requiring  notice.  It  occurs  in  his  thesis  on  the  effect  of 
supply  and  demand  on  market  values.  He  says,  "  the 
supply  of  money  is  all  the  money  in  circulation  at  the 
time,  and  the  demand  for  money  consists  of  all  the  goods 
offered  for  sale."  Again  he  postulates  this  fundamental 
error  in  these  words  :  "  as  the  whole  of  the  goods  in  the 
market  compose  the  demand  for  money,  so  the  whole 
of  the  money  constitutes  the  demand  for  goods.  The 
money  and  the  goods  are  seeking  each  other  for  the  pur- 
pose of  being  exchanged.  They  are  reciprocally  supply 
and  demand  on  each  other."  If  Mr.  Mill  had  substituted 
trading  power  for  money,  he  would  pretty  exactly  have 
expressed  a  great  fundamental  truth,  the  point  of  which 
becomes  very  clear  when  we  have  reached  the  knowledge 
that  the  goods  themselves,  by  means  of  their  representa- 
tives, bills,  etc.,  furnish  by  far  the  greatest  proportion  of 
the  capital,  or  trading  power,  they  are  "  seeking."  The 
absolute  truth  is,  the  goods  in  the  market  are,  by  means 
of  trading  power,  "  seeking  each  other  for  the  purpose  of 
being  exchanged."  As  for  money,  it  only  measures  and 
determines  the  ratio  of  value  at  which  the  goods  shall  be 
circulated  in  this  great  ocean  of  trading  power,  which 
constitutes  the  true  circulating  medium,  and  is  composed 
of  their  own  aggregation  of  values  with  some  addition 
from  accumulations  of  capital  (postulates  35,  36). 

9.  Money,  in  fact,  no  longer  constitutes  any  consider- 
able element,  or  factor,  in  the  trading  power  which  dis- 
tributes goods  from  the  producers   to   consumers,  and 

1  The  comparison  adopted  in  the  text  is  all  the  more  appropriate,  from  the  cir- 
cumstance that  the  chrysalis  of  the  butterfly  is  sometimes  called  "  aurelia"  from 
aurutn,  gold. 


MONEY   AND   BULLION.  IOI 

must  itself  be  treated  simply  as  "  trading  power."  The 
true  view  to  take,  is  to  regard  the  question  as  one  of  dis- 
tribution rather  than  of  exchange.  It  is  a  pity  to  see 
so  excellent  a  general  reasoner  as  Mr.  Mill  falling  into  so 
many  fundamental  errors.  It  is  so  notorious  a  fact,  that 
bargains  are  effected  between  producers  of  and  dealers 
in  goods,  and  payments  are  so  generally  made  without 
the  use  or  thought  of  money,  except  to  estimate  the 
prices  and  amounts,  that  one  hardly  has  patience  to 
refute  or  eliminate  the  blunders  and  bad  logic  from  what 
is  good  and  true.  But  it  is  absolutely  needful  to  dwell 
on  such  errors,  and  to  reproduce  and  repeat,  in  every 
logical  form,  such  arguments  as  I  am  now  using,  in  order 
to  prepare  the  ground  for  the  seeds  of  truth,  and  for  rea- 
soning out  sound  logical  conclusions. 

10.  The  great  fundamental  truth  to  be  ever  kept  in 
mind  is,  that  goods  themselves  furnish  the  chief  part  of 
their  own  circulating  medium,  or,  to  use  the  more  com- 
mon though  less  correct  expression,  "  circulate  them- 
selves "  by  means  of  their  own  inhering  market  value 
transferred  to  bills  and  other  commercial  instruments, 
which  are  turned  into  trading  power  by  bankers.  I 
strongly  urge  on  future  writers  on  economic  science,  the 
desirability  of  ceasing  to  speak  of  the  "  exchange  of 
goods,"  as  mystifying  what  is  really  a  very  clear  subject. 
Goods,  as  a  practical  fact,  are  not  exchanged  at  all  in  the 
industrial  world.  They  are,  on  the  other  hand,  as  an 
equally  practical  fact,  sold  and  distributed ;  and  the  dis- 
tribution is  not  at  all  effected  by  money,  except  by  means 
of  its  trading  power  :  and  bullion  ranks  along  with  other 
commodities  in  the  ratio  of  its  market  value.  It  will, 
therefore,  be  seen  how  small  a  part  the  precious  metals 
play  in  the  great  sum  of  values  acted  upon  in  the  various 
markets  by  production  and  consumption,  supply  and  de- 
mand.    The  whole  question  resolves  itself,  as  business  is 


102  CURRENCY. 

now  conducted,  into  this  one  practical  fact,  — "  Goods 
are  perpetually  seeking  exchange  for  trading  power,  and 
trading  power  is  perpetually  seeking  exchange  for  goods ; 
and  money  and  bullion  are  simple  factors  in  trading 
power."  In  this  view  of  the  actual  fact,  it  would  be-  as 
well  to  drop  the  use  of  the  term  "  medium  of  exchange  " 
in  to  to,  as  well  as  that  of  the  term  "  exchange  "  itself,  as 
applied  to  trade  in  goods. 

ii.  Modern  banking  supplies  the  methods  by  which 
trading  power,  as  I  have  postulated,  explained,  and  illus- 
trated it,  performs  its  appointed  duty  of  aiding  in  pro- 
ducing and  distributing  goods.  The  instruments  invented 
by  bankers  and  merchants  are  taken  by  each  trader,  or 
customer,  to  his  banker,  and  are  deposited,  or  discounted  ; 
and  the  proceeds,  after  deduction  of  interest,  are  placed 
to  his  credit  as  a  deposit.  Bankers'  ledgers  fitly  repre- 
sent supply  and  demand,  production  and  consumption. 
One  side  of  the  account  represents  credit,  and  the  other 
debt,  in  each  customers'  account ;  and  here  it  is  where 
banking,  as  now  practised,  aided  by  clearing-houses, 
plays  its  marvellous  role  in  effecting  settlements  and 
balancing  accounts  in  each  community,  as  well  as  the 
world  over.  Mr.  McCulloch  well  describes  the  results 
which  are  thus  brought  about  by  these  methods.  He 
says,  "among  countries  and  cities  having  considerable 
intercourse  together,  the  debts  mutually  due  by  each 
other  are  found,  in  ordinary  cases,  to  be  nearly  equal." 
So  much  for  the  numerous  theories  and  speculations 
about  domestic  and  foreign  trade,  and  respecting  bullion, 
being  a  specially  desirable  object  to  attract  to  a  country, 
and  for  "  settling  balances  of  trade." 

12.  The  position  occupied  by  bullion,  in  respect  to 
foreign  trade,  in  comparison  with  other  commodities, 
may  be  formulated  thus  :  "  So  far  from  bullion  being  the 
best  or  most  desirable  article  to  be  used  in  settling  bal- 


MONEY   AND   BULLION.  IO3 

ances  of  foreign  trade,  it  is  never  so  used  as  long  as  any 
other  articles  yield  a  paying  profit  on  shipment."  In 
other  words,  the  profit  on  bullion  is  always  so  small,  as 
not  to  be  a  safe  or  available  investment  for  export,  and 
hence  is  never  used  for  such  purposes  so  long  as  any 
thing  else  can  be  sent  that  will  leave  a  certain  margin 
of  profit.  To  illustrate  :  American  merchants  never  send 
their  bullion  or  coin  abroad  to  settle  foreign  indebted- 
ness, or  to  enable  them  to  buy  foreign  goods,  if  cotton, 
corn,  tobacco,  or  any  other  product  affords  a  profit ;  nor 
do  British  merchants  ever  ship  bullion  to  America,  if  they 
can  realize  even  a  very  small  profit  on  their  own  goods. 
These  self-evident  propositions  push  the  bullion  theory 
of  settling  balances  to  the  argumentum  ad  absurdum. 
The  use  of  bullion  for  such  purposes  is  sometimes  neces- 
sary, just  as  it  is  for  a  ship-master  to  carry  sand  for  bal- 
last when  he  cannot  find  paying  cargo. 

13.  When  gold  and  silver  bullion  are  imported  into  a 
country  which  produces  these  articles,  it  is  a  certain 
indication  of  poor  or  non-paying  trade ;  and  general 
business  depression  will,  as  a  rule,  be  found  to  prevail 
in  the  industries  of  such  a  country  on  all  such  occasions. 
Capital  invested  in  bullion  or  money  yields  no  profit, 
and  hence  every  good  business  man  will  avoid  them ; 
or,  if  he  has  accepted  payment  of  debts  or  goods  in 
these  non-paying  articles,  he  will  seek  to  get  rid  of  them 
the  first  moment  he  can  find  any  thing  that  promises  to 
yield  a  profit.  It  is  a  principle  of  trade  to  make  a 
double  profit,  if  possible,  —  a  profit  on  what  is  exported 
and  on  what  is  impqrted,  or  on  buying  and  selling.  But, 
when  the  merchant  is  obliged  to  bring  home  bullion,  he 
very  generally  gets  only  one  profit ;  and  his  bullion 
diminishes  that  profit,  and  must  be  parted  with  in  ex- 
change for  something  else  before  it  can  be  made  useful 
in  trade. 


104  CURRENCY. 

14.  In  the  United  States,  the  leaders  of  public  opinion 
connected  with  the  press  generally  view  with  great  satis- 
faction the  flow  of  bullion,  or  the  return  of  American 
gold  coin,  homewards.  It  is  then  claimed  to  be  a  sign 
of  the  approach  of  better  times ;  whereas  it  is  only  the 
result  of  a  state  of  foreign  trade  that  yields  no  profit,  and 
of  unemployed  labor  and  capital,  idle  mills,  and  "  hard 
times."  It  is  held  to  be  evidence  that  "  the  exchanges 
are  in  favor"  of  the  hu\\\on-importing  country,  and  of 
"a  favorable  balance  of  trade."  The  only  occasions,  in 
a  bxAWon-p/'oducing  country,  under  which  the  importation 
of  the  precious  metals  might  be  regarded  favorably, 
are,  where  these  metals  are  attracted,  by  a  demand  for 
metallic  currency,  to  fill  the  vacated  channel  of  circula- 
tion caused  by  an  over-issue  of  paper  undergoing  con- 
traction. I  have  shown  that  the  true  and  natural  method 
of  effecting  an  equilibrium  of  value  between  the  metallic 
and  the  paper  money  in  such  cases,  especially  in  a  bul- 
lion-producing country,  where  over-issues  have  not  been 
excessive,  is  to  await  the  growth  of  industry,  which  acts 
as  a  contraction,  that  will  arrest  the  export  of  the  home 
product  of  the  metals. 

I  shall  hereafter  devote  some  space  to  the  fundamental 
errors  very  generally  prevailing  respecting  the  so-called 
"  balances  of  trade  "  between  commercial  countries,  and 
the  mercantile  theory,  which  still  prevails  as  an  appar- 
ently ineradicable  idea  in  the  minds  of  a  large  class  in 
America  and  in  some  parts  of  Europe. 


ERRORS  RESPECTING  THE  BALANCE  OF  TRADE.    105 


CHAPTER  XII. 

POPULAR  ERRORS   RESPECTING    THE    BALANCE    OF    TRADE. — 
THE  NEW   MERCANTILE  THEORY. 

i.  I  have  already  alluded  to  the  fallacy  of  excepting 
the  trade  in  bullion  from  the  category  of  commodities  to 
which  the  principles  of  free  trade  have  been  applied  by 
British  legislation ;  and  pointed  out  that  the  Bank  of 
England  doctrinaires,  and  the  city  school  of  economists, 
have  revived,  in  a  new  form,  identical  in  principle,  how- 
ever, the  exploded  "  mercantile  theory."  This  theory,  as 
all  know,  who  possess  any  knowledge  of  modern  politi- 
cal economy,  teaches  that  the  precious  metals  constitute 
a  more  desirable  and  substantial  description  of  wealth 
than  other  products  of  industry,  for  which  those  who 
happen  to  own  them  are  always  desirous  to  exchange 
such  metals,  in  the  ratio  of  market  values.  From  this 
mere  assumption  they  proceed  to  argue,  that  the  foreign 
trade  of  a  country  should  be  so  regulated  by  legislation, 
or  the  power  of  the  Bank  of  England,  as  to  attract  or 
retain  in  it  a  large  supply  of  these  exceptionally  desira- 
ble metals.  As  I  have  remarked,  these  modern  doctrines 
are  identical,  in  principle,  with  those  so  ably  overthrown, 
more  than  a  century  ago,  by  Dr.  Adam  Smith.  It  can- 
not be  denied  that  the  plan  of  "  acting  on  the  ex- 
changes," by  the  bank,  is  the  same,  when  any  effect  is 
produced,  as  that  formerly  resorted  to  by  the  more  direct 
agency  of  laws  imposing  protective  duties  and  taxes  on 
the  export  of  the  precious  metals. 

2.  The  most  feasible  explanation  that  can  be  offered 
for  such  an  anomaly,  in  a  country  that  has  unreservedly 
accepted  the  doctrines  of  free  trade  in  their  largest  and 
most  comprehensive  application  to  all  industries,  is  the 


106  CURRENCY. 

extreme  conservatism  of  those  traditional  managers  of 
great  city  houses  and  the  great  national  bank.  Hence 
this  branch  of  political  science  (which  tolerates  such  an 
anomaly  as  the  Bank  of  England,  and  its  erroneous  policy 
of  seeking  perpetually  to  influence  the  trade  in  bullion) 
has  not  kept  pace  with  demonstrated  and  accepted  prin- 
ciples. Any  attempt  to  reform  the  British  monetary  sys- 
tem, of  which  the  Bank  of  England  is  the  centre,  and 
chief  ruling  power,  meets  with  the  strenuous  opposition 
of  the  elders,  who  constitute  the  managers  of  the  loan 
and  money  markets.  A  proposal  to  demonetize  the  Bank 
of  England  note,  or  abolish  it,  is  regarded  by  many  old 
gentlemen  as  little  short  high  treason.  It  took  a  third 
of  a  century  of  the  most  earnest  discussion  and  agitation 
to  accomplish  the  abolition  of  the  Corn  Laws,  and  obtain 
an  acknowledgment  of  the  doctrines  of  free  trade.  The 
possibility  that  the  principles  involved  in  this  great  vic- 
tory, achieved  by  logical  reasoning  over  powerful  inter- 
ests and  traditional  prejudices,  might  be  overridden  and 
trampled  on  with  impunity  by  a  great  financial  corpo- 
ration, nearly  allied  with  the  state,  by  raising  and  low- 
ering the  rate  of  interest,  probably  did  not  occur  to  the 
great  apostles  of  free  trade.  The  Bank  Act  was  passed 
in  1844,  by  the  efforts  of  the  statesman  who  became  the 
leader  in  the  free-trade  agitation,  which  ended  in  the 
repeal  of  the  Corn  Laws,  and  the  general  emancipation 
of  trade,  in  1846.  It,  however,  required  the  experience 
of  thirty  years'  working  of  the  Bank  Act,  under  the  inter- 
pretation (which  I  have  shown  to  be  erroneous)  given 
to  it  by  the  managers,  and  the  teachings  of  three  or  four 
financial  crises,  to  show  with  tolerable  exactitude  the  fun- 
damental errors  of  the  theory  and  practice  of  that  power- 
ful institution.  It  is  also  not  to  be  doubted  that  British 
statesmen  of  the  present  day  have  not  examined  this  sub- 
ject with  sufficient  care  to  comprehend  the  true  situation 
of  the  case. 


ERRORS  RESPECTING  THE  BALANCE  OF  TRADE.    IO7 

3.  The  evils  of  the  monetary  system,  upheld  by  the 
Bank  of  England  and  Lombard  Street  writers,  have  been 
ably  pointed  out  by  Professor  Bonamy  Price,  whose  keen 
dissecting  logic  and  power  of  analysis  have  done  much 
to  shake  confidence  in  the  infallibility  of  the  bank's  prac- 
tice of  playing  with  the  rate  to  influence  the  trade  in  the 
precious  metals.  As  yet,  however,  the  policy  remains 
unchanged ;  and  the  bank  managers  declare  in  the  most 
emphatic  manner  that  their  system  and  policy  is  "per- 
fect," and  the  evils  imputed  to  it  are  the  result  of 
unsound  or  "  bad  trade  "  {vide  the  speeches  and  writings 
of  Mr.  Hubbard,  M.P.,  and  bank  director).  While  the 
greater  part  of  the  practical  business  men  of  the  king- 
dom shut  their  eyes,  and  refuse  to  look  into  a  system  at 
which  they  grumble  on  occasions  of  crises,  it  is  not  sur- 
prising that  so  much  apathy  prevails,  and  that  nothing  is 
being  done  to  reform  the  abuse  of  a  power  that  only  the 
state  through  an  independent  department  can  satisfac- 
torily exercise. 

4.  The  theory  of  the  bank  is,  that,  when  the  balance 
of  trade  is  against  the  country  unduly,  there  is  a  ten- 
dency to  export  gold  to  settle  such  balances,  and  the  best 
method  to  avert  this  imagined  evil  is  to  make  trading 
capital  dear.  The  doctrines  of  free  trade  rest  on  the 
broad  basis  that  the  domestic  and  foreign  exchanges 
should  be  left  severely  alone,  to  be  regulated  by  the  only 
true  and  natural  power,  supply  and  demand.  Now,  let 
us  examine  and  analyze  the  principles  of  both  domestic 
and  foreign  trade,  and  see  how  far  any  artificial  inter- 
ferences are  justified.  Those  principles  are  generally 
stated  in  postulates  40-44,  which  I  will  extend  and 
divide  as  follows,  for  illustration  :  — 

First,  There  can  be  no  selling  without  buying,  which 
the  word  "  trade  "  implies. 

Second,  The  domestic  trade  of  a  country  is  a  trade 


108  CURRENCY. 

carried  on  amongst  the  individuals  and  firms  of  a 
country. 

Third,  Foreign  trade  is  a  trade  carried  on  between  the 
individuals  and  firms  of  one  country  and  those  of  other 
countries. 

Fourth,  All  trade,  in  a  free  market,  tends  continually 
to  balance  itself,  or  to  equilibrium ;  and  the  so-called 
"  balance  of  trade  "  betiveen  nations  is  merely  a  matter  of 
account  between  trading-houses,  which  always  balances 
itself  with  the  same  accuracy  as  the  two  sides  of  a  bank- 
er's or  merchant's  ledger. 

To  these  I  here  add  two  other  propositions  which  fol- 
low as  logical  corollaries  to  the  foregoing :  — 

Fifth,  All  facilities  afforded  by  law  and  by  bankers  and 
clearing-houses  to  the  free  action  of  the  natural  laws  of 
industry  are  fundamentally  right. 

Sixth,  All  restrictions  imposed  by  the  state,  or  by  cor- 
porations or  combinations  of  capitalists,  on  the  free  action 
of  the  natural  laws  of  industry,  are  evils,  and  are  contrary 
to  public  policy,  and  fundamentally  wrong. 

5.  The  mind  that  dwells  on  these  simple  formulated 
truths  will  be  unable  to  resist  the  conviction  that  free 
trade  lies  at  the  bottom  of  all  solid  and  enduring  pros- 
perity. These  postulates  clearly  express  the  fundamental 
idea,  that  there  is  no  distinction,  in  principle,  between 
domestic  and  foreign  trade,  and  that  both  kinds  continu- 
ally tend  to  equilibrium. 

6.  Although  I  hope  I  have  overthrown  the  theory 
practised  by  the  bank  of  operating,  as  it  were,  against 
the  action  of  the  natural  laws  of  trade,  in  respect  to  the 
export  of  bullion  to  settle  foreign  balances,  it  may  be  as 
well  to  remind  readers  of  the  extraordinary  delusion 
that  prevailed  in  the  city  and  especially  in  the  bank 
parlors  during  the  long  suspension  of  the  bank  from 
1797  to  1821,  that  "the  bank  note  was  not  at  a  discount. 


ERRORS  RESPECTING  THE  BALANCE  OF  TRADE.    IO9 

but  gold  was  at  a  premium,"  or  had  actually  risen  in  the 
market  by  comparison  with  other  articles.  They  who 
held  to  this  doctrine  asserted  that  the  large  export  of 
gold  to  subsidize  foreign  armies  had  caused  an  actual  rise 
in  the  price  of  the  metal,  and  that  the  inconvertible  bank 
note  was  the  true  pound  sterling.  Though  Mr.  Horner, 
author  of  the  famous  Bullion  Report,  and  Sir  Robert 
Peel,  then  a  young  man,  pointed  out  the  absurdity  of  this 
theory,  the  city  bankers  and  merchants  obstinately  re- 
fused to  accept  their  proofs.  The  idea  that  inconvertible 
banr  notes  could  correctly  represent  "  the  pound  ster- 
ling "  is  such  a  palpable  absurdity  that  even  no  intelligent 
business  man  of  the  present  day  can  be  found  who  asserts 
the  dogma.  Let  no  man  now  accept  the  equally  unsup- 
ported dogmas  of  the  bank  respecting  the  soundness 
of  its  theory  and  practice  in  the  management  of  the 
note  issue,  and  its  attempts  to  dominate  the  loan  market. 
I  say  this  to  such  as  are  prone  to  accept  dogmatic 
teaching  rather  than  logically  reasoned-out  conclusions. 
Whilst  the  traditional  fallacy  of  the  plan  of  seeking  to 
rule  the  foreign  exchanges,  and  turn  the  balance  of  trade 
by  means  of  the  bank  rate,  inheres  with  great  pertinacity 
to  the  city,  no  one  is  found  willing  to  insist  on  the'  delu- 
sion that  gold  had  actually  risen  in  market  value,  instead 
of  paper  having  fallen. 

7.  The  doctrine  that  the  foreign  trade  of  a  country,  in 
order  to  be  profitable,  must  show  an  excess  of  exports 
over  imports,  is  one  of  the  most  palpable  absurdities,  and 
is  the  foundation  of  the  old  mercantile  theory  of  seeking 
by  all  means  possible  to  attract  to  a  country  the  largest 
possible  supply  of  the  precious  metals  to  store  away  in 
the  cellars  of  bankers  and  traders.  Adam  Smith  has  so 
fully  considered  this  question  that  it  is  hardly  needful  to 
say  much  about  it.  When  the  exports  of  a  country  are 
found  very  generally  to  exceed  the  imports,  it  is  simply 


HO  CURRENCY. 


evidence  that  the  exporting  country,  or  the  one  whose 
balance  of  trade  is  regarded  as  very  favorable,  is  in- 
debted to  the  one  having  the  supposed  adverse  balance 
against  it ;  and  the  surplus  value  of  goods  exported  over 
goods  imported  represents  the  sum  applied  each  year  to 
the  payment  of  interest  and  principal.  The  class  of 
economists,  especially  in  the  United  States,  who  rejoice 
over  what  they  suppose  to  be  large  additions  to  the  na- 
tional wealth,  seeing  that  the  foreign  trade  of  Great  Britain 
shows  a  very  large  and  increasing  balance  against  .her, 
prophesy  the  approaching  downfall  of  the  nation.  \  Then 
the  returns  show  an  average  yearly,  apparent,,  balaifrx 
against  the  country  of  over  a  p£i  00,000,000,  they  see  in 
the  circumstance  an  early  condition  of  national  bank- 
ruptcy. The  very  contrary  is  the  case.  This  excess  of 
imports  over  exports  proves  two  facts ;  first,  that  she  is 
receiving  foreign  commodities,  including  bullion,  in  pay- 
ment of  interest  on  loans  which  her  subjects  have  made 
to  foreign  governments,  corporations,  and  individuals; 
and  second,  that  her  trade  is  profitable,  and  she  is  real- 
izing the  profits  on  her  exports  which,  with  the  interest 
payments,  make  up  the  balance-sheet  between  her  subjects 
and  the  citizens  of  other  countries.  The  theory  that  the 
citizens  of  one  country  lose  what  those  of  another  make, 
as  a  profit,  is  monstrous  nonsense.  If  such  were  the 
case,  the  same  thing  would  happen  in  the  trade  at  home 
between  individuals  and  firms  ;  and  one  half  the  commu- 
nity would  be  growing  rich,  while  the  other  half  would 
be  growing  poor,  which  is  absurd. 

8.  If  people  would  get  in  the  habit  of  simply  regard- 
ing foreign  trade  as  a  trade  between  individuals,  the  same 
as  the  home  trade,  they  will  get  rid  of  these  delusions 
about  the  supposed  advantages  of  having  a  balance  of 
trade  in  favor  of  one  country  over  another,  or  against  the 
rest  of  the  world.     Every  sound  trader  sees  to  it  that  he 


ERRORS   RESPECTING  THE   BALANCE   OF  TRADE.        Ill 

does  not  get  in  debt  more  than  he  can  pay,  and  no  gov- 
ernment or  legislative  intervention  is  needed  to  or  can 
help  individual  action.  In  fact,  all  such  interference  is  a 
direct  evil  in  its  results,  as  already  pointed  out. 

9.  Another  equally  absurd  delusion  prevails  respecting 
"debtor  and  creditor  nations."  Mr.  Seyd,  who  I  have 
before  quoted,  in  the  consideration  of  the  errors  of  the 
theory  and  practice  of  the  Bank  of  England,  has  imbibed 
this  delusion.  It  makes  no  difference  in  principle  or  in 
effect  whether  loans  are  contracted  at  home  or  abroad. 
The  only  things  to  be  considered  are  the  price  paid  for 
such  loans,  and  whether  the  proceeds  have  been  judi- 
ciously expended  in  productive  undertakings.  The  abso- 
lutely correct  theory  of  trade  is,  to  buy  your  goods  and 
borrow  your  capital  in  the  cheapest  market,  and  sell  them 
and  expend  your  loans  in  the  dearest  market.  That  is 
just  what  goes  on  at  home.  No  man  borrows  capital  of 
his  next-door  neighbor  at  ten  per  cent,  if,  by  going  to 
the  next  town,  he  can  get  it  for  live.  Exactly  the  same 
rule  prevails  in  respect  to  the  merchant,  and  it  is  the 
foundation  of  all  wisely  conducted  trade.  The  protec- 
tionist insists  on  compelling  people  to  buy  their  goods  of 
particular  classes  at  home,  because  he  fancies  there  is 
some  advantage  in  having  them  made  there  ;  though  they 
cost  double  the  price  at  which  they  can  be  purchased 
abroad. 

10.  If  this  delusive,  and,  to  some,  fascinating,  doc- 
trine were  really  the  true  principle  of  trade,  it  would 
follow  that  each  State  of  the  American  Union,  and  each 
county  and  town  in  Great  Britain,  should  be  "  protected  " 
against  all  the  rest  of  the  world.  The  people  in  each 
municipal  administration  should  demand  the  exclusion 
from  their  markets  of  all  goods,  and  the  results  of  all 
labor,  capital,  and  machinery,  not  produced  or  expended 
within  its  corporate  limits.     Finally,  to  reduce  the  matter 


112  CURRENCY. 

to  the  argitmentum  ad  absurdum,  every  man  ought  to 
be  compelled  by  law  to  make  for  himself  every  thing 
his  necessities  and  luxuries  may  require  him  to  buy  of 
others,  under  ordinary  conditions  of  society.  He  will 
then  have  no  balance  of  trade  to  make  him  unhappy,  as 
to  the  means  of  settlement. 

ii.  The  fact  that  bullion  is  no  better  to  settle  balances 
of  trade  than  cotton,  cheese,  or  beef,  if  so  good,  will 
appear  self-evident  when  we  have  come  to  perceive  the 
fact,  that  bullion  affords  the  least  profit  to  the  dealer,  of 
any  product  of  industry ;  nor  does  the  miner  who  pro- 
duces the  article,  as  a  rule,  make  any  higher  wages,  and 
very  often  much  lower,  than  the  man  that  runs  an  engine 
to  coin  it  into  money.  The  monster  of  all  delusions  is 
"  protection  to  domestic  industry." 

12.  As  a  great  practical  illustration  of  the  folly  of  treat- 
ing bullion  as  an  exceptionally  available  article  for  settling 
foreign  balances  of  trade,  I  refer  to  the  case  of  France, 
which  paid  to  Germany  ^200,000,000  in  three  years, 
as  a  war  indemnity,  against  which  she  had  received  no 
valuable  consideration,  unless  a  good  beating  may  be  so 
considered.  This  huge  and  unprecedented  amount  of 
capital was  transferred  from  the  "  debtor  country  to  the 
creditor  country,"  without  the  use  of  more  than  ten  per 
cent  in  gold.  The  question  how  the  other  nine-tenths 
was  paid  has  been  a  puzzle  to  many  persons,  ignorant  of 
what  are  called  the  principles  of  "  international  trade." 
But  no  one  can  doubt  that  the  balance,  in  this  case, 
against  France,  was  actually  paid  and  receipted  for. 
When  we  analyze  the  process  it  will  appear  very  simple. 
The  first  instalment  was  actually,  in  part,  paid  in  gold 
supplied  by  those  who  took  the  loans,  needful  to  provide 
the  means  of  payment.  The  void  in  the  specie  circula- 
tion was  filled  by  an  increased  issue  of  Bank  of  France 


ERRORS   RESPECTING  THE   BALANCE   OF  TRADE.        113 

notes,  which,  being  for  the  time  made  inconvertible, 
were  held  at  par  by  the  demand  for  actual  money,  —  the 
notes  being  also  legal  tender.  All  the  rest  of  this  un- 
precedented payment  was  made  through  bankers,  and  the 
balances  were  effected  by  the  clearing-houses  of  Great 
Britain  and  the  Continental  centres  of  finance  ;  and  the 
proceeds  were  supplied  by  the  credit  of  France,  which 
anticipated  the  earnings  of  French  industry,  which  it 
will  take  many  years  of  toil  on  the  part  of  the  people  of 
France  to  make  good.  But  Germany  did  not  need  or 
require  gold  in  payment  of  this  "  balance,"  though  so 
stipulated  in  the  bond.  She  took  things  that  were  more 
advantageous,  on  which  there  was  a  better  profit  than  on 
bullion.  Her  traders  and  manufacturers  —  the  latter 
needing  numerous  "  raw  materials  "  to  keep  their  facto- 
ries going  —  took  in  payment  what  was  better  to  them 
than  gold ;  and  they  paid  the  German  Government  the 
capital  in  question.  The  Government  didn't  want  gold, 
they  simply  wanted  and  took  "  trading  power,"  which 
they  used  for  such  purposes  as  they  intended  the  loan  to 
effect.  It  is  needless  to  follow  out  all  the  details,  to  show 
what  became  of  the  indemnity.  It  is  sufficient  to  know 
it  was  not  paid  in  this  "  exceptionally  desirable  and  cov- 
eted commodity,"  bullion,  or  in  money  either.  Nor  is  it 
needful  to  point  out  how  all  the  commercial  nations  of 
the  world,  having  trade  with  France,  aided  in  the  great 
operation. 

13.  The  only  true  method  of  arriving  at  a  clear  per- 
ception of  what  is  called  "international  trade,"  is  to 
regard  the  whole  world  as  being  made  up  of  an  aggre- 
gation of  individual  traders ;  and  foreign,  as  well  as 
domestic  trade,  as  being  carried  on  between  these,  as 
stated  in  the  postulates  of  this  chapter.  The  principles 
discussed  in  this  chapter  are  of  the  highest  importance 


114  CURRENCY. 

to  those  who  would  master  the  monetary  question,  and 
should  be  gotten  "  by  heart "  by  all  students  of  the 
science.1 


CHAPTER  XIII. 


MONEY,  CURRENCY,  LOANS,  AND   CHECKS. TRUE   AND   FALSE 

PRINCIPLES. 

i.  One  of  the  leading  objects  of  this  work  is  to 
endeavor  to  eliminate  fundamental  errors  and  currently 
accepted  fallacies  from  what  seem  to  be  well  reasoned- 
out  and  established  principles,  which  are  steadily  gaining 
ground  in  economic  science,  so  far  as  they  seem  to  affect 
that  branch  known  as  "Monetary  Science."  If  all  who 
travel  over  the  same  ground  would  act  on  the  same  plan, 
we  might  hope,  by  and  by,  to  have  a  residuum  of  solid 
truth,  and  a  system  that  can  be  appealed  to  as  confi- 
dently as  geometry.  Like  the  husbandman  who  seeks 
to  grow  good  grain,  we  must  first  weed  the  field  of  all 
noxious  weeds.  Adam  Smith,  who  did  so  much  towards 
erecting  the  principles  and  practice  of  industry  into  a 
science,  was  compelled  to  devote  a  large  space  to  the 
overthrow  of  almost  universally  prevailing  errors  then 
dogmatically  insisted  on,  and  entering  largely  into  the 
groundwork  of  commercial  legislation.  Many  of  these 
principles,  overthrown  by  him  by  unanswerable  arguments, 
still  survive  in  some  form  in  all  countries.  But  even  he 
fell  into  many  errors,  which  nearly  all  the  best  writers  on 
economic  science  have  failed  to  detect,  and  which  are 
thus  perpetuated  from  generation  to  generation.  Let  it 
not,  then,  be  considered  that  I  am  devoting  undue  space 

1  Vide  an  excellent  letter  published  by  Mr.  Charles  H.  Marshall,  an  intelli- 
gent New  York  merchant,  in  "  The  New  York  Herald"  of  Jan.  23,  187S,  on  the 
subject  of  "  The  Balance  of  Trade,"  —  note  No.  IV. 


MONEY,    CURRENCY,   LOANS,   AND    CHECKS.  115 

or  giving  too  much  importance  to  this  matter  of  exposing 
erroneous  principles  and  practices.  When  all  such 
errors  shall  be  eliminated  from  the  theory  and  practice 
of  industry,  the  science  of  political  economy  will  be 
reduced  to  a  few  simple  postulates  such  as  those  I  have 
set  out  with. 

2.  I  have  laid  much  stress  on  the  bad  logic  and  gen- 
eral confusion  of  thought  engendered  in  the  minds  of 
intelligent  business  men,  and  even  statesmen  and  pro- 
fessional economists,  like  Ricardo,  McCulloch,  and  Mill, 
by  not  distinguishing  the  marked  difference  between 
money  and  trading  power,  or  floating  capital,  and  the  two 
elements  of  which  the  latter  is  composed ;  to  wit,  the 
evidences  of  goods  in  transit  from  producers  to  con- 
sumers, and  capital  accumulated  from  past  industries. 
Mr.  Mill  has  remarked,  on  the  subjects  I  am  now  enter- 
ing upon,  as  follows  :  "  The  two  topics,  Currency  and 
Loans,  though  themselves  distinct,  are  so  blended  in  the 
phenomena  of  what  is  called  the  money  market,  that  it 
is  impossible  to  understand  the  one  without  the  other ; 
and  in  many  minds  the  two  subjects  are  mixed  up  in  the 
most  inextricable  confusion."  How  admirably  this  de- 
scription applies  to  the  whole  host  of  "  Money  Article  " 
writers  in  Lombard  and  Wall  Streets  !  But  is  it  surpris- 
ing when  we  find  the  late  Mr.  Bageat,  a  banker,  and  the 
highest  Lombard-street  authority,  accused,  by  a  learned 
Oxford  professor  of  political  economy,  of  using  the  term 
money  in  six  distinct  senses,  and  never  deigning  to  point 
out  the  perfectly  clear  and  logical  distinction  between 
money  and  capital  ?  This  confounding  of  currency,  which 
embraces  money,  with  loans,  or,  more  properly  speaking, 
what  is  loaned,  which  is  Trading  Power,  leads  the  public, 
when  there  is  a  pressure,  or  any  sudden  increased  de- 
mand for  capital,  to  call  out  lustily  for  more  bank  notes, 
when  trading  power  is  what  is  wanted. 


Il6  CURRENCY. 

3.  The  confusion  of  thought,  referred  to  by  Mr.  Mill 
as  being  engendered  in  some  minds  on  the  subject  of 
currency  and  loans,  would  immediately  disappear,  like 
the  morning  mist  before  the  rising  sun,  by  the  inculca- 
tion of  the  perfectly  plain  method  of  differentiating  all 
the  principles  and  elements  involved  in  the  various  pro- 
cesses of  utilizing  trading  power.  Money,  for  instance, 
differentiates  the  ratios  of  all  values,  or,  more  correctly 
speaking,  the  ratios  of  the  market  values  of  all  commodi- 
ties, lands,  labor,  etc.,  in  comparison  with  each  other. 
Money  also  has  the  principle,  peculiar  to  itself,  of  differ- 
entiating the  value  of  the  material  of  which  it  is  fabri- 
cated, in  comparison  with  other  things  having  market 
value.  That  there  is  any  mysterious  or  other  relation 
between  "  currency  and  loans  "  is  a  fundamental  error, 
and  no  amount  of  reasoning  can  make  out  such  relation- 
ship. When  currency  forms  a  part,  which  it  sometimes 
does,  in  a  very  limited  degree,  of  the  ocean  of  trading 
power  dealt  in,  in  the  loan  market,  it  is  not  in  its  char- 
acter as  currency  at  all,  but  {to  the  extent  of  its  market 
value)  as  trading  power.  It  certainly  requires  no  great 
effort  of  ratiocination  to  reach  this  most  important  start- 
ing-point. 

4.  Adam  Smith  had  a  clearer  perception  than  most 
authoritative  writers  of  the  true  distinction  between  cur- 
rency and  loans  ;  but  neither  he  nor  Mr.  Mill  saw  dis- 
tinctly and  vividly  that  currency,  which  means  simply 
metallic  and  paper  money,  holds  no  other  relation  to 
loans  than  that  of  so  much  trading  power  or  capital. 
Money  (I  always  mean  by  this  word  metallic,  unless 
otherwise  stated),  in  its  measuring  capacity  of  pounds, 
shillings,  pence,  or  dollars  and  cents,  performs  the  same 
service,  in  measuring  out  capital  in  the  loan  market,  as 
the  quintal  or  hundred  weight  does  in  the  grain  market. 
I  have  repeated  this  proposition  in  order  to  apply  it  more 
fully  to  points  I  aim  to  establish. 


MONEY,    CURRENCY,    LOANS,    AND   CHECKS.  1 1  7 

5.  Dr.  Smith,  speaking  of  capital,  which  he  calls  stock, 
says,  "  The  quantity  of  stock,  therefore,  or,  as  it  is  com- 
monly expressed,  money,  which  can  be  lent  at  interest 
in  any  country,  is  not  regulated  by  the  value  of  the 
money,  whether  paper  or  coin,  which  serves  as  the  instru- 
ment of  the  different  loans  made  in  that  country,  but 
by  the  value  of  that  part  of  the  annual  produce,  which, 
as  soon  as  it  comes,  either  from  the  ground,  or  the  hands 
of  the  productive  laborers,  is  destined,  not  only  for  re- 
placing a  capital,  as  the  owner  does  not  care  to  be  at 
the  trouble  of  employing  himself."  Dr.  Smith  evidently 
meant  the  accumulated  profit  arising  from  the  various 
industries  of  such  country,  which,  as  stated  in  postulate 
36,  forms  a  part  of  the  floating  capital,  or  trading 
power,  from  which  loans  are  drawn ;  but  he  has  no- 
where shown  that  he  had  grasped  the  fact  that  goods 
themselves  supply  by  far  the  greater  part  of  that  reser- 
voir of  capital  (not  money)  out  of  which  the  commer- 
cial world  at  large  draws  supplies  to  keep  all  those  pro- 
ductive industries  in  constant  motion,  or  to  carry  on 
reproduction  in  perpetual  succession. 

6.  There  is  something  indefinite  in  the  term  "  mar- 
ket." We  speak  of  the  "  loan  market  "  as  if  it  were 
some  particular  place,  where  all  who  have  capital  in  any 
form  to  lend,  and  all  who  want  to  borrow,  meet  together, 
and  make  their  bargains.  But  in  effect  the  same  end 
is  achieved  by  a  very  different  process.  The  loan  mar- 
ket is,  in  fact,  composed  of  the  aggregation  of  all  that 
portion  of  the  people  who  have  any  thing  they  desire 
to  lend,  which  very  generally  is  held  by  bankers  on 
deposit,  and  those  who  have  bills  given  them  for  goods 
sold.  The  latter  class  are,  through  the  aid  of  the 
banker,  in  a  sense  borrowers  of  their  own  capital ;  since 
they  furnish  the  very  trading  power  they  are  enabled  to 
borrow,  through  the  magic  intervention   of  the    check. 


1 1 8  CURRENCY. 

When  the  borrowed  capital  is  drawn  for  use,  the  check 
passes  it  over  to  pay  a  debt  or  complete  a  purchase. 
When  the  bill  falls  due,  which  the  bank  has  transmuted 
into  purchasing  power,  the  maker  pays  it  by  check. 
So  every  thing  is  carried  on  in  perpetual  succession  by 
check,  and  seldom  is  any  money  drawn.  These  checks 
are  daily  balanced  against  each  other  at  the  various 
central  clearing-houses,  which  I  shall  by  and  by  more 
particularly  describe.  This,  then,  is  the  loan  market,  or 
"  trading-power  market." 

7.  The  money  market  is  quite  a  different  affair.  It  is 
everywhere  where  money  is  bought  and  sold,  where 
money  is  actually  paid  over  the  counter  for  goods,  and 
goods  are  paid  for  money.  Adam  Smith  very  well  ex- 
presses it  when  he  says,  "  Money  is  a  commodity,  with 
regard  to  which  every  man  is  a  merchant."  It  is,  in 
fact,  in  the  small  dealings  by  retail,  and  in  the  payment 
of  wages,  and  largely  for  farm  produce,  and  fares  on 
steamers,  railways,  etc.,  where  actual  cash  is  paid,  that 
the  money  market  becomes  conspicuous.  It  is  in  these 
dealings  that  the  demand  for  money  arises  ;  and  the  sup- 
ply will  always  be  properly  meted  out  under  the  system 
I  have  proposed,  especially  if  that  system  should  be 
extended,  by  treaty  arrangements,  so  as  to  embrace  all 
the  great  industrial  nations  of  Europe  and  America. 

8.  One  of  the  most  deceptive  and  alluring  errors  of 
amateur  economists  of  the  "practical  school,"  and  exten- 
sively prevailing  among  the  rank  and  file  of  politicians, 
is  the  doctrine  that  Government  is  bound  to  supply  a  cer- 
tain amount  of  metallic  and  paper  currency  per  capita,  or 
to  average  it  at  so  much  a  head  for  every  man,  woman, 
and  child  in  a  country.  This  is  statistical  lore  brought 
into  the  regions  of  scientific  principles.  The  question  of 
population  has  no  special  relation  to  the  volume  of  cur- 
rency needed  to  conduct  the  industries  of  a  people,  other 


MONEY,  CURRENCY,  LOANS,  AND  CHECKS.      119 

than  so  far  as  it  can  be  made  to  indicate  the  number  and 
amount  of  transactions  requiring  the  use  of  money.  No 
doubt  a  larger  supply  of  actual  money  is  needed  to 
conduct  rural  than  town  industries,  in  relation  both  to 
population  and  transactions.  This  arises  from  the  fact 
that  farmers  and  country  people  do  not,  as  a  rule,  keep 
bank  deposit  accounts ;  and  the  money  thus  circulates 
more  sluggishly  than  in  towns  and  cities.  But  the  per 
capita  plan  of  regulating  the  supply  of  money  is  not  much 
better  than  to  form  the  estimate  on  the  number  of  codfish 
taken  out  of  the  sea,  which  probably  does  not  vaiy  much, 
one  year  taken  with  another.  The  true  scientific  and 
practical  regulator  is  the  law  of  supply  and  demand  ;  leav- 
ing the  coinage  as  nearly  free  as  possible,  and  placing  the 
issue  of  paper  money  in  a  State  Department,  such  as  I 
shall  more  particularly  describe  in  a  later  chapter,  and  to 
which  I  have  already  frequently  alluded. 

9.  It  will  pretty  clearly  appear  to  those  who  have 
followed  my  course  of  reasoning  thus  far,  that  there  is 
no  more  relationship  between  currency  and  loans  than 
there  is  between  sugar  and  cheese.  They  are,  as  Mr. 
Mill  says,  "quite  distinct  things."  This  being  settled, 
the  theory  that  banks  of  issue  are  necessary  to  regulate 
the  supply  of  paper  money,  so  as  to  equally  meet  de- 
mand, becomes  a  meaningless  assertion.  This  is  a  very 
favorite  argument  with  a  large  class,  especially  in  Amer- 
ica, a  class  whose  interests  lie  in  supporting  the  National 
Banking  System,  so  far  as  the  issue  of  paper  money  is 
concerned.  These  philosophers  hold  exclusive  .  control 
of  a  large  number  of  influential  journals  in  the  United 
States,  and  urge  their  opinions  with  great  pertinacity. 
The  truth  is  self-evident,  that  banks  of  issue  are  the  very 
worst  parties  to  be  intrusted  with  the  duty  of  regulating 
the  laws  of  nature  ;  for  that  is  the  absurd  proposition  in- 
volved.    Their  interests  disqualify  them  for  the  duty,  and 


120  CURRENCY. 

hence  the  issue  of  paper  money  by  banks  should  be 
abolished.  This  proposition,  however,  will  require  more 
extended  examination  in  a  future  chapter  on  banks  of 
issue. 

10.  The  theory  that  there  is  a  natural  rate  of  interest, 
about  which  the  market  rate  revolves,  or  oscillates,  is 
another  fallacy.  Both  Adam  Smith  and  Ricardo  have 
fancied  the  existence  of  such  a  rate  ;  and  Mill,  remarking 
on  their  theories,  says,  "  the  natural  rate  is  some  rate 
about  which  the  market  rate  oscillates,  and  to  which  it 
always  tends  to  return."  There  is  certainly  no  such 
natural  rate,  which  would,  if  it  existed,  be  a  permanent 
fixed  rate.  A  single  moment's  reflection  will  convince 
any  logical  mind  that  the  mai-ket  rate  is  the  only  natural 
rate  of  interest,  because  it  is  the  market  that  is  acted  on 
by  the  natural  law  of  supply  and  demand.  I  have  stated 
this  proposition  in  postulate  ■£>.  It  is  self-evident  that 
the  market  rate  of  interest  is  regulated  by  the  supply  of 
capital  to,  and  the  demand  for,  capital  in  the  loan  mar- 
ket ;  and  hence  the  natural  rate  is  the  market  rate.  I  am 
afraid  I  am  upsetting  a  great  many  long-cherished  fun- 
damental errors,  which  will  have  to  be  eliminated  out 
of  the  received  theories  of  industrial  science ;  and  pos- 
sibly many  more  must  follow. 

ii.  I  shall  maintain,  as  a  correct  principle,  that  all 
bankers  and  traders  who  require  currency  should  buy  it 
at  the  market  price,  and  for  the  full  expressed  value. 
The  plan  of  lending  to  banks  a  government  guaranteed 
paper  circulation  on  national  securities,  as  in  the  United 
States,  and  to  the  extent  provided  by  the  Bank  Act  of 
1844  to  the  Bank  of  England,  is  a  violation  of  sound 
principles  of  public  policy.  It  is  the  worst  kind  of  class 
legislation,  and  has  no  justification  in  principle ;  while  it 
is  palpably  evident  that  it  is  a  false  system  of  paper 
money,  which  should  be  based  only  on  metal. 


MONEY,    CURRENCY,    LOANS,    AND   CHECKS.  121 

12.  There  is  no  distinction  to  be  drawn  between  me- 
tallic and  paper  money,  in  respect  to  the  parts  they 
respectively  perform  in  the  general  operations  of  indus- 
try, other  than  that  the  former  regulates  the  supply  of 
the  latter,  so  as  to  exactly  meet  the  demand  for  it.  In 
practice,  a  sovereign  or  a  half-eagle  serves  no  better 
purpose  in  making  a  purchase  or  extinguishing  a  debt 
than  a  pound  or  a  five-dollar  note.  7/  is  simply  a  matter 
of  convenience,  and  hence  the  public  will  generally  prefer 
the  note  to  the  coin.  Such  notes  are  easier  and  more 
safely  carried,  and,  when  the  security  is  ample,  will,  as  a 
rule,  be  preferred  to  the  metal.  Mr.  Scott  Russell,  the 
eminent  shipbuilder,  mentioned  to  me  as  a  fact,  that,  in 
Scotland,  he  found  great  difficulty  in  getting  the  country 
people  to  take  sovereigns  in  payment  of  travelling  ex- 
penses. He  said  more  than  once  his  host  or  hostess 
pushed  the  gold  coin  back  to  him  in  disgust,  saying,  "  I 
nae  want  that  thing.     Gie  me  a  poond  note." 

13.  One  of  the  chief  obstacles  to  the  progress  of  sci- 
entific principles  is  interposed  by  what  are  termed 
"vested  interests."  Every  step  towards  reform  in  mone- 
tary science,  or  in  giving  effect  to  its  teachings,  is  certain 
to  meet  with  strenuous  opposition  from  those  who  have 
real  or  fancied  individual  or  class  interests  likely  to  be 
effected  by  the  change.  There  are  some,  however,  whose 
education  in  old  dogmas  and  teachings  lead  them  to  resist 
from  what  the  Rocky  Mountain  men  call  "  pure  cussed- 
ness,"  which  may  be  translated  to  mean  pure  obstinacy 
and  preconceived  opinions.  In  the  matter  of  issuing 
paper  money,  a  certain  class  seeks  to  make  a  profit  by 
issuing  such  money.  In  the  case  of  a  note  issue  founded 
on  and  guaranteed  by  public  securities,  which  makes 
bankers  reckless  in  regard  to  keeping  on  hand  an  ade- 
quate reserve  or  trading  balance  in  cash,  the  temptation 
to   embark   in  banking  as   a   mere   speculation  is  very 


12  2  CURRENCY. 

great.  The  securities  draw  interest,  and  the  notes  are 
used  to  make  another  and  larger  profit  by  lending  or 
discounting  commercial  paper.  It  is  a  nice  method  of 
"  being  able  to  eat  your  pudding  and  have  it  too."  Pos- 
sibly a  time  may  come  when  such  a  system  will  not  be 
so  advantageous,  or  sufficiently  popular  to  maintain  its 
existence. 


CHAPTER    XIV. 


MONEY,    CURRENCY,    AND    BANKING,    AND    THE    ECONOMY    OF 
PAPER  MONEY   CONSIDERED. 

i.  I  propose  to  devote  this  chapter  to  the  subject  of 
money  and  currency  in  connection  with  banking,  and  the 
extravagance  in  metallic  money ;  and  the  first  thing  to 
which  I  shall  turn  my  attention  is  the  fallacy  that  prevails 
among  a  large  class  of  economists  and  practical  business 
men,  both  in  America  and  England,  respecting  the  policy 
of  delegating  the  prerogative  of  the  state  to  joint-stock 
companies  and  private  parties  to  issue  paper  money. 
Professor  Bonamy  Price  seems  to  be  a  representative  man 
on  the  side  of  those  who  favor  this  policy.  He  says  in 
his  "  Treatise  on  Banking  and  Currency,"  published  in 
1875,  "There  is  a  very  solid  and  serious  distinction  be- 
tween a  private  issuer  of  notes  and  a  government.  The 
property  given  to  a  solvent  banker  for  his  notes  is  not 
lost  to  the  nation."  (I  italicize  the  passages  that  seem 
to  me  to  be  palpable  errors  of  fact,  as  well  as  of  princi- 
ple.) "The  banker  lends,  if  he  is  a  good  banker,  to 
persons  who  do  not  waste  or  destroy.  The  public  pays 
exactly  the  same  for  the  tool  of  exchange,  whether  it 
procures  it  from  the  miner  or  from  the  bank.  But  when 
the  wealth  is  given  to  the  miner  he  consumes  it.  The 
nation  retains,  no  doubt,  an  equal  value  of  gold  ;  but  it  is 


THE    ECONOMY    OF    PAPER    MONEY    CONSIDERED.         I  23 

lost  as  capital  beyond  the  work  of  exchanging,  in  buying 
and  selling.  Its  services  as  a  tool  are  all  that  the  nation 
gets  from  it.  The  same  services  are  procured  from  the 
bank  note,  only  it  costs  but  sixpence  to  the  banker  and 
the  nation.  Compared  with  a  £$  note,  wealth  to  the 
extent  of  £4  19s.  6d.,  which  must  have  been  sent  aivay 
to  a  foreign  miner,  now  remains  in  England.  But  gov- 
ernment issues  are  directly  connected  with  consumption. 
The  Government  spends  and  consumes  what  it  procures 
with  its  notes. 

2.  The  reasoning  in  the  above  paragraph  is  so  palpably 
fallacious  that  it  is  difficult  to  credit  it  to  the  same  acute 
mind  that  has  so  ably  in  the  same  work  analyzed  and 
reasoned  out  the  business  operations  of  a  banker,  and  let 
in  such  a  flood  of  light  on  a  subject  just  beginning  to  be 
clearly  understood  in  all  its  multifarious  operations  and 
influences  on  the  industries  of  the  world.  There  is,  no 
doubt,  "  a  very  solid  and  serious  distinction  between  a 
private  issuer  of  notes"  and  a  state  issuer;  but  the 
reasoning  of  Professor  Price  is  a  simple,  plain,  non 
sequitur.  Nothing  is  more  self-evident  than  the  fact  that 
if  the  Government,  as  the  agent  of  the  state,  can  pur- 
chase the  articles  it  consumes  in  the  maintenance  of  the 
army,  the  navy,  and  all  departments,  and  can  pay  for  the 
services  of  its  hundreds  of  thousands  of  employees,  with 
the  notes  of  the  state,  it  saves  the  nation  just  so  much. 
The  note  is  no  more  a  tool  of  exchange  than  an  equal 
amount  of  any  other  trading  power ;  and,  in  the  light  of 
trading  power,  or  capital,  it  is  not  of  the  slightest  impor- 
tance whether  it  be  issued  by  the  state  or  by  a  private 
issuer,  save  only  the  considerations,  which  are  the  safest 
issuers?  which  supplies  the  best  and  most  trustworthy 
tool?  These  considerations  being  conceded  to  be  equal, 
it  only  becomes  a  question  whether  the  state,  or,  say,  the 
whole  people,  shall  have  the  profits  of  the  issue,  or  one 


124  CURRENCY. 

favored  corporation,  or  two  thousand,  as  in  the  United 
States.  "Government  issues"  are  no  more  "directly 
connected  with  consumption"  than  "private  issues." 

3.  It  resolves  itself,  then,  into  the  simple  question  as 
to  who  shall  have  the  profit ;  that  is,  so  far  as  any  princi- 
ple is  concerned  in  respect  to  the  work  which  "  the  tool 
of  exchange  "  performs.  This  is  as  true  as  any  proposition 
in  geometry,  and  Professor  Price's  conclusions  fall  to  the 
ground.  The  ^5  note,  if  issued  by  the  state,  will  cost  no 
more  to  the  state  than  to  a  bank;  and  the  £4. igs.  6d., 
which  the  Professor  assumes  to  be  the  profit  of  the  note, 
will  belong  to  the  state,  if  the  state  acts  as  the  issuer, 
instead  of  giving  it  away  to  the  bank.  Mr.  Price's  argu- 
ment as  to  the  comparative  advantage  of  utilizing  the 
issue  of  notes  as  substitutes  for  gold  can  only  be  allowed 
as  an  incident  connected  with  paper  money.  The  main 
object  of  such  money  being  to  secure  to  the  public  a 
more  convenient  tool  than  gold  coin,  the  matter  of  profit 
must  be  kept  strictly  in  subordination  to  that  object.  It 
is  only  when  a  larger  accumulation  of  metal  takes  place 
than  is  needed  to  secure  the  convertibility  of  the  issue 
of  paper  money,  that  a  portion  of  the  gold  can  be  parted 
with  and  sold  to  the  public  or  to  foreign  states  and 
traders.  Again,  I  desire  to  impress  on  Professor  Price's 
mind  that  neither  kind  of  money  is  one  whit  better  than 
an  equal  amount  of  any  other  kind  of  trading  power 
needed  in-  the  industrial  pursuits  of  the  people,  and  the 
latter  is  really  the  element  in  which  the  banker  "  lives 
and  moves  and  has  his  being."  The  supply  of  trading 
power  is  the  specialty  of  the  banker,  as  the  supply  of 
money,  metallic  and  paper,  should  be  of  the  state.  I 
hope  the  Professor  will  set  himself  right  on  this  question, 
and,  when  he  issues  a  new  edition  of  his  valuable  "  Trea- 
tise on  Banking  and  Currency,"  will  make  a  note  of  the 
error  he  has  so  palpably  fallen  into  in  his  reasoning  on 
this  subject. 


THE   ECONOMY   OF   PAPER   MONEY   CONSIDERED.        1 25 

4.  In  respect  to  Mr.  Price's  comparison  of  notes  with 
gold,  he  has  also  fallen  into  an  error.  The  market  value 
of  gold  is  regulated  exactly  the  same  as  that  of  any  other 
commodity.  But  I  have  shown,  that,  when  converted 
into  money,  the  law  of  supply  and  demand  acts  on  it  in 
its  character  as  money;  which,  if  there  were  limitations 
set  on  the  supply,  would  raise  its  market  value  above  that 
of  gold  bullion.  On  the  other  hand,  if  more  is  coined 
than  is  needed,  the  surplus  coin  will  presently  find  its 
way  into  the  melting-pot.  The  goods  sent  to  the  "  for- 
eign miner  "  to  pay  him  for  his  labor  are  no  more  lost 
by  his  "  consumptive  "  habits  than  goods  exchanged  for 
any  other  valuable  product,  at  home  or  abroad.  So  long 
as  people  and  nations  want  gold,  and  are  willing  to  pay 
for  it,  the  foreign  miner  is  as  good  a  consumer  as  any 
other  worker.     Who  can  deny  this  fact  ? 

5.  Then,  as  to  the  substitution  of  paper  money,  as  far 
as  is  practicable,  if  that  principle  is  admissible  at  all, 
the  advantage  will  still  be  in  favor  of  the  nation's  retain- 
ing the  issue  in  its  own  hands.  But  why  has  my  much 
esteemed  and  distinguished  friend  mixed  up  the  two 
questions,  —  that  of  the  best  issuer  of  paper  money  with 
that  of  the  economy  of  the  two  tools,  paper  and  metallic 
money?  They  are  quite  separate  and  distinct;  "there 
is  a  very  solid  and  serious  distinction  between  "  the  two 
things.  If  the  tool  bank  notes  and  the  tool  state  notes 
are  equal  in  efficiency,  and  the  state  is  equal  in  solvency 
to  a  bank,  we  have  only  to  balance  the  profits  and  advan- 
tages of  paper  money  against  those  of  metallic  money,  so 
far  at  least  as  the  former  can  be  safely  used  as  a  substi- 
tute for  the  latter. 

6.  The  point  which  Professor  Price  has  attempted  to 
make  in  favor  of  delegating  the  prerogative  of  the  state  to 
private  issuers  of  paper  money,  —  in  which  I  have  shown 
he  has  failed,  —  is  diametrically  opposed  to  the  plan  of 


126  CURRENCY. 

separating  the  Issue  from  the  Banking  Department  of 
the  Bank  of  England.  This  separation,  he  claims,  —  and 
I  admit  the  claim  to  be  good,  —  makes  the  Issue  De- 
partment just  what  the  Professor  calls  it,  "a  state  issue 
department  conducted  by  the  Bank  of  England  directors 
on  the  premises  of  the  bank."  I  quote  from  memory, 
but  the  quotation  is  right  in  substance.  The  Professor  is 
therefore  inconsistent  with  himself. 

7.  I  take  exception  also  to  his  argument  against  en- 
couraging the  importation  of  gold,  as  being  contrary 
to  the  principles  of  free  trade.  I  have  already  refuted 
the  theory  that  the  consumption  by  the  foreign  miner  of 
the  wealth  given  in  exchange  for  his  product  is  a  loss 
to  the  nation.  "The  wealth  given  in  exchange"  for  any 
foreign  product,  whether  of  utility  or  of  luxury,  is  also 
consumed.  But  what  has  the  matter  of  consumption  to 
do  in  either  case ;  that  is,  in  respect  of  gold  or  of  any 
other  article  of  trade?  The  only  question  for  the  mer- 
chant and  economist  to  consider  is,  whether  the  trade  is 
profitable.  It  is  simply  an  exchange  of  equivalents  in  mar- 
ket value,  —  nothing  more,  nothing  less.  It  is  a  very  com- 
mon delusion,  even  among  practised  economic  writers, 
that  it  is  advantageous  to  a  country  to  produce  precious 
metals  rather  than  other  valuable  commodities,  or  than 
to  buy  them  abroad  with  other  products.  Now,  there  is 
only  one  case  where  the  home  product  of  these  metals 
is  more  advantageous  than  importation  from  abroad ; 
namely,  where  they  can  be  produced  cheaper  at  home. 
If  the  labor  and  capital  employed  in  their  production 
at  home  afford  a  better  profit  than  when  employed  in 
producing  other  things,  which  can  be  exchanged  for  the 
needed  supply  of  the  metals  abroad,  then  home  mining 
is  advantageous.  It  is  simply  a  question  of  profit  and 
loss  to  those  engaged  in  the  business,  or  how  labor  and 
capital  can  best  be  invested. 


THE   ECONOMY   OF   PAPER   MONEY   CONSIDERED.        1 27 

8.  It  will  be  seen  hereafter,  in  Chap.  XXVII.,  para- 
graph 7,  that  the  claim  set  up  by  Adam  Smith  and  most 
economists  to  the  present  day,  that  the  substitution  of 
bank  notes  for  coin  is  a  great  advantage  to  a  country  on 
the  score  of  economy,  is  a  complete,  though  an  almost 
unchallenged,  delusion.  I  shall  show  that  the  best  cur- 
rency for  a  country  is  one  composed  of  metallic  coins 
and  paper,  issued  pound  for  pound,  dollar  for  dollar,  on 
such  metal,  the  two  being  interconvertible  at  the  pleasure 
of  the  holder,  and  claim  that  to  the  public  such  currency 
is  the  least  expensive. 

9.  There  is  no  certain,  or  even  near  approximate, 
method  of  ascertaining  the  amount  of  circulation  in  a 
country  where  it  is  made  up  of  mixed  metallic  and  paper 
money ;  though  the  issues  of  the  latter  may  be  esti- 
mated. Good  authorities  assume  the  circulation  in  the 
United  States  (May,  1879)  to  be,  paper,  $650,000,000; 
gold,  $250,000,000;  silver,  $50,000,000  ;  subsidiary  coin, 
$50,000,000;  total,  $1,000,000,000.  The  coin,  on  this 
estimate,  is  $350,000,000  against  $650,000,000  of  paper, 
—  not  very  far  from  two  dollars  of  paper  to  one  of  metal ; 
and  if  we  discard  the  $50,000,000  of  subsidiary  coin, 
which  is  so  much  overvalued,  and  class  it  with  paper,  we 
shall  have  $300,000,000  of  metal  against  $700,000,000 
of  paper  and  other  token  money. 

10.  According  to  Mr.  Ernst  Seyd,  an  able  German 
actuary  and  statistician  in  London,  the  circulation  of 
Great  Britain  stood  in  1876:  — 

In  sovereigns  and  half-sovereigns       .         .  ^105,000,000 

Silver  and  copper  coins      ....  16,000,000 

"  Provincial,"  Scotch,  and  Irish  notes        .  15,000,000 

Bank  of  England  notes     ....  37,000,000 

£173,000,000 
Mr.  Seyd  adds,  "  Of  this,  the  metallic  currency  may  be 
taken  as  all  in  circulation;  but  of  the  country  bank 


128  CURRENCY. 

notes  there  may  be  but  ,£12,000,000;  of  the  Bank  of 
England,  but  ^27,000,000." 

Mr.  Seyd  probably  means  active  circulation  ;  for,  in  his 
work  on  the  "  Error  of  the  Note  Issue  of  the  Bank  of 
England,"  he  treats  the  notes  held  by  the  Bank  as 
"reserve,"  as  being  in  circulation.  This  is  the  correct 
method  of  regarding  all  notes  or  metal  held  as  reserve 
by  bankers  and  merchants.  But,  in  comparing  the 
amount  of  paper  and  metal  in  order  to  see  how  much  is 
saved  by  paper,  we  must  take  account  of  the  metal  held 
in  reserve  to  meet  conversions  of  notes.  This  will  make 
the  matter  stand  thus  :  Bank  of  England  notes  uncovered 
by  metal,  $15,000,000  ;  country  notes,  less  one-third  held 
for  reserve,  $10,000,000.  We  thus  find  the  excess  of 
notes  above  the  bullion  and  coin  held  for  conversions 
is  just  ^25,000,000,  against  ^121,000,000  of  metal. 
But  inasmuch  as  the  metal  held  in  the  Issue  Department 
of  the  bank  is  nearly  all  in  the  form  of  bullion  not 
counted  by  Mr.  Seyd,  and  which  would  be  promptly 
coined  to  fill  the  vaccuum  that  would  ensue  if  the  ^27,- 
000,000  of  notes  issued  on  metal  were  withdrawn,  we 
must  add  that  amount  to  the  coin  circulation,  less,  say, 
^3,000,000  in  coin,  held  by  the  issue.  We  shall  now 
find  the  metal  to  stand  as  ^145,000,000  against  ,£25,- 
000,000  of  paper,  or  nearly  six  times  as  much.  Great 
Britain  thus  saves  the  sum  of  ^25,000,000  by  the  use  of 
paper,  or  as  a  financial  gain,  the  interest  on  which,  at 
three  per  cent,  is  ,£750,000 ;  and  this  does  not  go  to  the 
whole  people,  but  to  a  select  few  bank-stock  holders. 

11.  I  arn  now  speaking  only  of  the  use  of  paper 
money  as  a  financial  expedient,  which  I  insist  is  a 
secondary,  and  in  no  case  properly  a  primary,  considera- 
tion. Its  primary  object  is  to  supply  a  better  tool  of 
industry  that  is  more  convenient  and  readily  available 
than  metal.      I  discard  in  toto  the  theory  that  paper 


THE   ECONOMY   OF   PAPER   MONEY   CONSIDERED.        I  29 

money  should  be  used  to  create  new  capital,  or  as  an 
auxiliary  to  financial  operations,  and  shall  hereafter 
demonstrate  that  money  and  finance  ought  to  be  wholly 
separated,  in  thought  and  in  practice,  from  each  other 
(Chaps.  XXIV. -XXVI.).  The  banks  of  Amsterdam, 
Venice,  Hamburg,  and  Sweden  were  pure  and  simple 
banks  of  issue,  and  did  not  at  first  lend  the  metal  re- 
ceived in  payment  of  notes ;  and  it  was  only  when  they 
did  so  that  they  involved  themselves  and  the  public  in 
disaster. 

12.  The  comparison  between  the  two  systems,  that 
of  Great  Britain  and  America,  shows  this  result,  that  the 
metallic  circulation  of  the  former  is  as  about  six  to  one 
of  paper ;  and  in  America  the  metal  is  about  as  one  to 
two  of  paper.  This  will  be  further  considered  hereafter 
(Chap.  XXVI.),  where  the  highly  inflated  condition  of 
the  currency  and  business  in  the  United  States  will  be 
pointed  out.  My  object  is  to  show,  that,  so  far  as  finan- 
cial gain  is  concerned,  by  the  issue  of  paper  money,  it 
bears  no  comparison  to  the  benefits  arising  from  a  sound 
monetary  system.  I  think,  however,  that,  by  means  of  a 
state  issue  department,  automatic  in  its  action,  experience 
may  show  that  a  portion  of  the  gold  received  in  ex- 
change for  notes  may  be  used  to  reduce  the  public  debt 
say  a  third  or  a  half;  but  such  use  will  tend  to  inflate  the 
currency,  and  must  be  so  gauged  as  to  spread  the  sales 
over  a  long  period,  or  be  confined  to  the  annual  increase 
of  the  demand  for  curre?icy,  created  by  the  annual  in- 
crease in  the  industries  of  the  world.  I  will,  in  treating 
more  specifically  of  the  organization  of  such  a  depart- 
ment, point  out  how  the  uses  of  metal  may  be  minimized 
in  Great  Britain  by  the  issue  of  one-pound  notes,  which, 
as  I  before  observed,  must  be  left  to  experience  and  the 
demands  of  industry  for  notes  to  determine. 


130  CURRENCY. 


CHAPTER  XV. 

BANKS   OF  ISSUE,    DEPOSIT,    AND   DISCOUNT. THEIR    ORIGIN. 

THE   ISSUE   OF   PAPER    MONEY    NOT    LEGITIMATE   EANK- 

ING. CANNOT   PROPERLY    BE   DELEGATED   TO    BANKS. 

i.  The  subjects  to  be  considered  in  this  chapter  are 
of  extreme  interest  in  monetary  science.  They  bear 
down  strongly  on  what  are  termed  vested  rights,  legal 
and  equitable,  and  traditional  prejudices.  Such  con- 
siderations always  crop  out,  and  oppose  themselves  to 
every  social  and  industrial  reform.  They  are  creatures 
that  die  hard,  and  live  down,  very  often,  several  genera- 
tions of  men.  In  order  to  show,  demonstrably,  that  the 
issue  of  paper  money  is  not  legitimately  the  prerogative 
of  bankers,  I  propose  to  point  out  the  distinctive  features 
of  the  three  kinds  of  banks  mentioned  at  the  head  of 
this  chapter,  and  ascertain  what  connection  banking,  as 
now  conducted,  has  with  metallic  and  paper  money.  I 
shall  show  that  all  sound  and  good  banking  is  confined 
to  receiving  and  holding  on  deposit  "  other  folks'  " 
capital,  and  discounting  commercial  paper,  or  bills  given 
in  payment  of  goods  in  course  of  production  and  distri- 
bution, as  pointed  out  in  postulates  35,  36. 

2.  I  can  add  nothing  to  the  clear  analysis  made  by 
Professor  Price  of  the  business  of  a  banker ;  but  he  has 
overlooked  the  manifest  distinction  existing  in  theory  and 
practice  between  the  issuing  of  notes  to  take  the  place 
of  money,  and  that  of  dealing  in  trading  power,  a  small 
part  of  which  only  is  made  up  of  money.  He  has,  how- 
ever, in  a  few  words  stated  the  exact  and  legitimate  busi- 
ness of  a  modern  banker.  He  says  "  The  bank  and  its 
great  instruments,  the  check  and  the  bill  of  exchange, 
transfer  the  ownership  of  wealth  from  one  man  to  another. 


BANKS   OF    ISSUE,    DEPOSIT,    AND    DISCOUNT.  I3I 

But  banking  is  not  currency,  and  hopeless  confusion 
must  result  if  it  is  regarded  as  currency.  Indeed,  the 
referring  to  currency  as  the  cause  of  many  of  the  most 
important  events  in  banking  is,  to  this  hour,  the  fatal 
cause  of  the  unintelligibleness  of  that  really  simple 
matter,  currency.  The  practice  of  banking  leads  to  a 
vast  diminution  in  the  use  of  currency  in  the  quantity 
of  coin  and  bank  notes  employed ;  but  they  are  essen- 
tially distinct  instruments,  precisely  as  a  plough  drawn  by 
horses  is  a  different  tool  from  a  spade  worked  by  a  man, 
though  they  both  perform  the  same  service  of  digging  up 
the  ground." 

3.  The  legitimate  offices  of  a  banker,  then,  are  to  facil- 
itate the  "  transfer  of  wealth,"  or,  more  correctly  speaking, 
trading  power,  or  capital,  which  he  has  found  out  how  to 
do,  by  utilizing  the  value  of  goods  in  course  of  production 
and  distribution.  The  circumstance,  that  by  far  the  larger 
proportion  of  this  business  is  conducted  by  non-issuing 
banks,  and  is  effected  with  the  use  of  only  one-thirtieth 
part  of  paper  money,  is  demonstrative  that  banking  has 
no  practical  or  theoretical  relation  to  the  issuing  of 
notes.  Furthermore,  it  is  a  question  hardly  to  be  dis- 
puted, that  these  non-issuing  bankers  find  their  profit  in 
not  issuing  notes.  They  earn,  and,  as  a  rule,  return,  a 
better  profit  on  the  capital  invested,  than  such  as  distract 
their  attention,  and  occupy  their  time  on  a  business  of 
a  totally  different  character,  and  which  probably,  on  the 
whole,  has  caused  more  loss  to  the  public,  the  stockhold- 
ers, and  individuals  connected  with  the  issuing  of  paper 
money,  than  all  the  profits  that  have  ever  arisen  there- 
from. It  is  one  of  those  illusory  methods  of  seeking  to 
make  wealth,  like  the  prospecting  for  gold  and  diamonds, 
that  numbers  its  victims  by  the  thousand,  while  those  who 
have  been  successful  count  by  hundreds  or  tens.  Any 
one  who  will  take  the  trouble  to  investigate  this  subject, 


132 


CURRENCY. 


going  back  a  hundred  years,  will  be  amazed  at  the  enor- 
mous sacrifices  of  capital  that  banks  of  issue  and  wrongly 
managed  government  issues  have  inflicted  on  the  world. 
Still,  the  delusion  clings  to  business  men  and  economists 
that  banks  of  issue  are  the  right  things,  and  that  they, 
and  they  only,  know  how  to  mete  out  currency  in  con- 
formity with  supply  and  demand.  But  a  careful  analysis 
of  the  business,  and  the  objects  actually  attained  by  and 
through  the  instrumentality  of  banking,  as  conducted  at 
this  time,  disclose  two  important  facts  :  First,  that  nearly 
all  the  advantages,  and  they  are  enormous,  which  have 
inured  to  society  from  banking,  have  proceeded  from 
banks  of  deposits  and  discount  irrespective  of  notes  ;  and 
second,  that  nearly  all  the  evils  inflicted  on  mankind  by 
bankers  are  directly  traceable  to  banks  of  issue,  and  the 
issuing  of  notes.  These  are  solid  reasons  for  putting  an 
end  to  the  issuing  paper  currency  by  banks,  and  remitting 
the  prerogative  back  to  the  state. 

4.  But  I  must  now  proceed  to  point  out  the  distinction 
between  banks  of  deposit  and  discount,  and  such  as  issue 
circulating,  or  currency  notes.  "  The  hopeless  confusion 
of  ideas  "  respecting  the  issue  and  use  of  paper  currency, 
or  money,  in  connection  with  banking,  is,  no  doubt,  due 
to  the  circumstance,  that  until  lately  in  the  United  King- 
dom, and  still  very  generally  in  America,  banks  of  deposit 
and  discount  have  also  been  and  are  banks  of  issue. 
Whenever  the  state  assumes  and  exercises  the  prerogative 
of  issuing  paper,  as  it  always  has  exercised  it  in  respect 
to  metallic  money,  and  the  name  of  bank  note  is  abol- 
ished, then  "  the  source  of  unintelligibleness  "  will  disap- 
pear. So  long,  however,  as  there  are  banks  of  issue  and 
bank  notes,  the  public  will  continue  "to  connect  currency 
with  banking."  To  logical  reasoners  and  economists,  as 
a  rule,  the  distinction  between  the  printing  and  issuing 
of  notes  which  the  banker  engages  to  pay  in  money,  on 


BANKS   OF   ISSUE,    DEPOSIT,    AND   DISCOUNT.  1 33 

demand,  and  the  using  of  such  notes,  which  represent 
the  banker's  credit  only,  and  not  goods,  appears  perfectly 
clear. 

5.  The  comparison  of  the  plough  and  the  spade  well 
defines  the  distinction  in  question.  The  banker  in  his 
proper  sphere  is  at  the  same  time  a  borrower  and  a 
lender.  In  a  sense  he  lends  a  man  his  own  capital,  when 
he  discounts  his  bill  founded  on  a  sale  of  goods.  But  he 
also  borrows  his  depositors'  capital,  and  lends  it  to  traders 
along  with  the  proceeds  of  their  own  bills,  which,  by  the 
magic  power  of  the  check,  he  is  able  to  do.  When  the 
banker  lends  his  own  notes,  he  simply  trades  on  his  own, 
and  not  other  folks',  credit.  This  is  a  manifest  and  funda- 
mental distinction  between  banks  of  deposit  and  discount 
and  banks  of  issue.  The  cases  of  the  Bank  of  England 
where  the  Government,  in  effect,  lends  the  bank  the 
credit  of  the  state,  on  public  securities,  to  the  extent  of 
^15,000,000  in  the  form  of  notes  to  trade  on,  and  of  the 
United  States  where  the  Government  lends  to  all  national 
banks,  without  limit,  ninety  per  cent  of  paper  money  fully 
guaranteed,  which  is  the  same  thing  as  lending  the  public 
credit,  on  all  Government  securities  lodged  with  the 
Treasurer  of  the  United  States,  are  anomalies  in  banking 
and  currency.  Yet  neither  the  Bank  of  England  nor  the 
national  banks  of  the  United  States  are  any  more  suc- 
cessful, or  possess  greater  ability  to  promote  industrial 
pursuits,  or  to  earn  profits  for  their  shareholders,  than 
non-issuing  banks  and  bankers.  The  question  of  the 
Government,  as  the  agent  of  the  state,  lending  notes  to 
banks  to  trade  on,  excluding  all  other  classes,  will  occupy 
more  attention  hereafter. 

6.  That  there  is  a  marked  distinction  between  a  bank- 
er's trading  on  his  own  and  on  that  of  his  customers' 
credit,  and  on  the  security  of  goods,  must,  I  think,  be 
admitted.     The  one  case  is  trading  on  credit  pure  and 


134  CURRENCY. 

simple ;  the  other  is  trading  on  actual  capital.  Though 
a  man's  credit  may  and  does  serve  the  purposes  of  capi- 
tal, it  is  unlike  actual  capital  existing  in  the  accumulated 
savings  of  industry,  and  actual  goods  represented  by  bills. 
It  is  this  difference  that  marks  the  boundaries  between 
banks  of  issue  and  of  non-issue.  The  issuing  banker 
trades  on  his  own  credit  to  the  extent  to  which  he  can 
circulate  his  notes ;  the  non-issuing  banker  has  solid 
capital  to  trade  on.  If  this  were  not  true  of  the  issuing 
banker,  he  would  have  no  motive  of  profit  in  circulating 
his  own  notes,  instead  of  notes  of  the  state.  It  is  true, 
when  the  notes  are  paid  out,  they  are  used,  by  the  public 
at  large,  as  money  and  trading  power  in  by  far  the  greater 
number  of  transactions  where  they  are  used.  It  is  only 
as  money  that  such  notes  can  be  kept  in  circulation.  If 
they  reach  the  hands  of  a  trader,  he  puts  them  back  into 
his  bank  ;  and  they  presently  return  to  the  issuer.  Traders, 
in  their  regular  course  of  business,  seldom  draw  notes  or 
coin.  They  use  checks  in  perpetual  succession,  as  I  have 
somewhere  else  shown.  Genuine  banking  is,  in  fact,  as 
Professor  Price  has  shown,  simply  acting  as  a  broker 
between  producers  of  goods  and  consumers,  between 
buyers  and  sellers. 

7.  I  have,  I  trust,  sufficiently  demonstrated,  that  the 
issuing  of  paper  money  is,  in  reality,  what  Professor  Price 
says  of  it,  not  banking  at  all,  though  he  insists  that  banks 
ought  to  issue  it ;  and  that  a  banker  can  trade  as  well  on 
notes  issued  by  a  state,  like  the  greenbacks  of  the  United 
States,  or  notes  of  the  Bank  of  England  or  France.  Let 
us  briefly  notice  the  origin  of  banks,  as  we  now  know 
them.  There  were  bankers  and  "  money  changers  "  in 
ancient  times,  but  they  were  very  different  affairs  from  the 
banks  of  modern  times.  The  first  examples  of  what  may 
be  called  issuing  banks,  were  those  of  Amsterdam,  Sweden, 
Hamburg,  and  Venice.     These  banks  were  started  in  the 


BANKS   OF  ISSUE,    DEPOSIT,   AND    DISCOUNT.  1 35 

fifteenth  and  sixteenth  centuries,  and  originated  in  con- 
sequence of  the  great  abuses  that  had  crept  into  the 
monetary  systems  of  most  parts  of  Europe.  The  practice 
of  clipping,  filing,  and  overvaluing  metallic  coins,  by  pro- 
fessional rogues  and  fraudulent  kings  and  legislatures,  had 
become  intolerable.  These  banks  were  established  to 
remedy  those  abuses,  and  were  pure  and  simple  banks 
of  issue.  What  the}-  did  was  to  receive  metal  by  weight, 
at  its  market  value,  deducting  the  cost  of  coinage  and 
management.  For  all  such  deposits  they  issued  their 
notes,  or,  in  some  cases,  receipts,  to  be  held  while  the 
metal  was  being  recoined.  McLeod  says,  "  none  of  these 
banks  did  any  business  on  their  own  account  by  way  of 
discounting  bills  or  making  loans.  Thus  we  see  the  pe- 
culiar function  of  all  these  banks,  which  were  pure  banks 
of  deposit,  was  to  issue  promissory  notes,  payable  to 
bearer  on  demand,  which,  however,  did  not  exceed  the 
quantity  of  the  bullion  they  were  substituted  for."  The 
notes  were  mere  vouchers  for  the  deposits  of  metal. 

8.  The  Bank  of  England,  established  in  1694,  was  the 
first  bank  of  deposit  and  issue  in  England.  But  it  was 
also  a  bank  of  discount.  Mr.  McLeod  says  the  names, 
"  bank  and  banker,  were  utterly  unknown  in  England  in 
the  time  of  Charles  the  First."  Those  who  dealt  in 
money  and  loans  were  then,  respectively,  known  as  or 
called  "  money  changers "  and  "  money  scriveners." 
The  original  capital  of  the  Bank  of  England  was  ^1,200,- 
000,  all  of  which  was  lent  to  the  Government  for  the 
privilege  of  issuing  a  like  amount  of  notes,  uncovered  by 
specie,  and  having  also  granted  to  it  the  right  to  receive 
deposits  and  lend  capital  and  money  on  commercial 
paper  and  other  securities.  This  was  the  origin  of  the 
bad  system  of  founding  an  issue  of  paper  currency  on 
public  securities,  and  treating  notes  as  good  cash  reserve, 
which  still  clings  to  both  the  British  and  American  na- 


136  CURRENCY. 

tions  with  desperate  tenacity.  It  was  a  plan  which  enabled 
the  supposed  lucky  lenders  of  capital  to  get  the  current 
rate  of  interest  on  it,  and  have  it,  too,  to  trade  on  in  the 
form  of  notes  or  paper  money. 

9.  The  prestige  which  the  first  British  bank  acquired, 
by  its  sort  of  partnership  with  the  State,  made  the  bank  a 
great  success,  and  has  been  the  parent  of  all  the  manias 
that  have  so  often  and  so  violently  raged  in  Great  Britain, 
until  the  year  1844,  for  the  establishment  of  banks  of  issue, 
deposit,  and  discount,  combined.  In  the  American  Colo- 
nies, now  the  United  States,  the  practice  in  question 
received  its  highest  and  culminating  abuse,  where  the 
issue  of  paper  money  became  a  burlesque  on  monetary 
and  financial  concerns.  During  the  latter  part  of  the 
last  and  beginning  of  the  present  century,  up  to  1844, 
the  multiplication  of  such  "  money-making  "  banks,  by  bad 
and  reckless  competition,  and  the  over-supply  of  paper 
money,  leading  to  inflation  and  overtrading,  brought 
stupendous  ruin  on  large  bodies  of  stockholders  and  the 
general  public. 

10.  In  Great  Britain  there  were  three  epochs,  during 
the  period  last  mentioned,  when  these  manias  for  issuing 
paper  money  prevailed;  namely,  from  1810  to  1819, 
from  1823  to  1825,  and  from  1835  to  1838,  each  ending 
in  hundreds,  if  not  thousands,  of  failures,  and  the  loss 
to  shareholders  and  the  public  of  sums  of  startling  magni- 
tude, and  the  destruction  of  business  houses  and  indus- 
trial interests  beyond  estimate.  These  disasters  led  to  the 
passage  of  the  Bank  Act  of  1844,  prohibiting  the  issue  of 
paper  money  by  any  new  companies  or  firms,  and  totally 
abolishing  banks  of  issue  (except  the  Bank  of  England) 
within  fifty  miles  of  London. 

n.  The  banks  of  Amsterdam,  Sweden,  Venice,  and 
Hamburg,  being  restrained  from  issuing  any  more  notes 
than  the  value  of  the  gold  on  which  they  were  issued,  and 


BANKS   OF   ISSUE,    DEPOSIT,    AND   DISCOUNT.  137 

not  being  allowed  to  trade,  were  pure  and  simple  banks 
of  issue,  in  effect,  being  compelled  to  hold  all  the  gold 
received  for  the  redemption  of  their  notes.  Thus  no  possi- 
ble harm  could  arise  from  the  issue  of  notes  fully  covered 
by  metal ;  and  their  greater  convenience,  as  a  tool  of  in- 
dustry, than  metal,  soon  made  their  notes  very  popular. 
There  were  also  many  circumstances  which  conspired  to 
render  the  Bank  of  England  both  popular  and  successful 
from  the  start.  These  circumstances  led  to  its  receiving 
a  large  line  of  deposits,  which  amply  supplied  it  with  metal 
and  trading  capital,  for  which  it  paid  no  interest.  There 
were  some  other  advantages  which  it  enjoyed,  ist,  It 
was  under  the  management  of  wealthy  and  experienced 
men,  who  could  influence  business.  2d,  It  had  no  com- 
petition, except  from  private  houses.  3d,  It  held  the 
government  balances,  and  had  the  prestige  of  being  con- 
sidered a  national  bank,  and  managed  to  a  large  extent 
the  government  finances,  and  negotiated  government 
loans.  It  has  ever  since  enjoyed  these  and  other  great 
privileges  ;  but  competition  has  long  since  set  a  limit  on 
its  profits,  which  are  far  below  those  of  the  Bank  of  France, 
—  the  only  bank  of  issue  in  that  country,  —  and  numerous 
joint-stock  banks. 

12.  Having  conceded  so  much  to  the  success,  charac- 
ter, and  standing  of  the  Bank  of  England,  I  am  led,  from 
all  that  I  can  gather  respecting  the  embarrassments  so 
often  brought  on  it  by  its  7iote  issue,  at  present  of 
^15,000,000,  on  securities,  to  the  irresistible  conclusion, 
that,  on  the  whole,  such  issue  has  been  an  injury  to  the 
concern.  I  think  a  clever  actuary  and  accountant,  like 
Mr.  Seyd,  who  had  the  time  and  patience  to  go  into  a 
close  analytical  investigation  of  its  affairs  from  the  be- 
ginning, could  demonstrate  that  the  Bank  of  England 
has  been  a  large  loser  by  its  issue  of  notes  instead  of  con- 
fining itself  wholly  to  trading  on  its  own  and  other  folks' 


138  CURRENCY. 

capital,  including  ,£5,000,000  of  free  government  de- 
posits. Furthermore,  from  a  pretty  careful  study  of  the 
history  of  British  banking  and  currency,  I  am  led  to 
think  that  economists,  from  Adam  Smith  to  Ricardo, 
McCulloch,  Mill,  and  Price,  have  exaggerated  the  value, 
to  the  banking  classes  at  least,  of  paper  money,  for  the 
reasons  I  have  assigned ;  that  is,  the  enormous  periodic 
losses,  and  the  restraints  that  the  issue  of  notes  impose 
on  legitimate  banking.  What  advantages  might  have 
arisen  from  or  may  hereafter  arise  out  of  a  well  and 
ably  conducted  state  issue  department  is  quite  another 
matter. 

13.  I  lay  it  down  as  a  self-evident  and  fundamental 
principle,  that  paper  money,  being  simply  a  more  con- 
venient tool  than  metallic,  ought  never  to  be  issued  for 
the  direct  object  of  profit,  or  for  the  creation  of  private 
or  national  resources.  When  the  main  object  of  issuing 
currency  notes  is  gain,  as  it  always  has  been,  till  the 
Bank  Act  of  1844  set  a  limit  to  the  issue  on  securities, 
the  tendency  is  to  over-issue,  or  keep  out  more  notes 
than  can  be  made  safely  to  circulate.  In  order  effectu- 
ally to  guard  against  the  possibilities  of  over-trading  in 
paper  money,  the  principle  I  have  laid  down  is,  that  the 
first  object  to  be  aimed  at,  is  to  secure  an  adequate,  and 
only  an  adequate,  quantity  of  more  convenient  tools  than 
sovereigns  or  other  gold  coins.  The  profit  must  only  be 
regarded  as  of  secondary  importance,  and  incidental. 
That  is,  if  it  shall  be  found  that  the  note  issue  of  a  state 
money  department  shall  bring  about  such  an  economiza- 
tion  of  metal  as  I  have  pointed  out  in  a  former  chapter, 
then  the  state  may  avail  itself,  in  a  limited  degree,  of 
such  profit,  and  use  it  as  resources.  It  cannot  be  doubted 
that  a  well-conducted  state  department,  in  such  coun- 
tries as  Great  Britain  and  the  United  States,  would  not 
only  supply  the  best  industrial  tool,  in  the  form  of  paper 


BANKS   OF   ISSUE,    DEPOSIT,   AND   DISCOUNT.  1 39 

money,  but  would  incidentally  yield  a  larger  profit  than 
any  bank,  or  number  of  banks,  all  of  which  would  pur- 
chase their  supplies  of  paper  money  from  the  state 
department.  Notes  issued  by  the  state,  and  held  within 
the  strict  limits  of  supply  and  demand,  would  require  very 
little  gold,  comparatively,  to  maintain  their  market  value 
and  hold  them  at  par  with  gold  :  besides,  their  converti- 
bility would  be  guaranteed  by  the  whole  resources  of  the 
nation ;  whilst  those  of  banks,  unless  aided  by  Govern- 
ment, command  only  a  very  limited  amount  of  backing. 

14.  The  question  soon  coming  up  for  consideration 
by  British  statesmen  is,  whether  the  present  Bank  of 
England  Act,  on  renewal,  shall  be  so  amended  as  to 
transfer  more  promptly  than  is  now  taking  place  the  en- 
tire country,  Scotch,  and  Irish  circulations,  to  the  Bank 
of  England,  to  be  made  available  by  lodging  in  the  Issue 
Department  an  equal  amount  of  dead  securities ;  or 
whether  a  state  issue  department,  pure  and  simple,  shall 
be  created,  and  established  at  Whitehall.  The  great  suc- 
cess of  the  India  State  Issue  of  notes,  under  very  serious 
difficulties,  should  encourage  a  hope  that  the  latter  course 
may  be  adopted. 

15.  If  the  Government  of  the  day,  taking  a  narrow 
and  mistaken  view  of  the  important  principles  and  still 
more  important  public  interests  involved,  determine  to 
enlarge  the  present  plan  of  issuing  notes  on  securities, 
the  limit  of  such  fiduciary  issue  will  be  raised  to  ^30,- 
800,000.  To  this  extent,  then,  would  the  evils  I  have  so 
fully  pointed  out  in  the  chapters  on  the  Bank  of  England 
theory  and  practice  be  increased.  The  policy  of  Lord 
Beaconsfield's  government,  so  far  as  it  has  been  devel- 
oped, seems  to  favor  the  carrying  out  fully  Sir  Robert 
Peel's  intention  of  gradually  transferring  the  entire  note 
issue  of  the  kingdom  to  the  Bank  of  England.  That 
such  a  result  would  lead  to  an  increased  sensitiveness  in 


140  CURRENCY. 

financial  affairs,  and,  by  the  increased  power  conferred 
on  the  bank,  to  still  more  dictatorial  interference  by  it 
with  the  loan  market  and  the  trade  in  bullion,  I  think 
cannot  be  doubted. 


CHAPTER  XVI. 


BANKS   OF   DEPOSIT    AND    DISCOUNT,    OR    LEGITIMATE   BANK- 
ING  VERSUS   BANKS   OF   ISSUE   AND   CLEARING-HOUSES. 

i.  At  the  risk  of  being  charged  with  prolixity,  I  feel 
compelled  to  draw  occasionally  from  the  fountain  of 
truth  deductions  already  made  and  applied,  in  establish- 
ing other  fundamental  and  collateral  branches  of  the 
subject,  or  used  to  overthrow  errors.  Professor  Price 
has  so  fully  examined  and  pointed  out  the  operations  of 
legitimate  banking  that  I  am  spared  much  labor,  and 
what  I  shall  say  in  this  chapter  presupposes  a  well 
grounded  knowledge  of  the  subject  so  ably  treated  by 
him.  That  legitimate  banking,  in  the  present  age,  has 
nothing  in  common  with  the  issue  of  notes  or  paper 
money,  I  accept  as  a  demonstrated  truth.  The  bank, 
whether  it  be  a  single  individual,  a  firm,  or  a  joint-stock 
company,  must  possess  an  adequate  amount  of  cash 
capital,  —  that  is,  actual  money,  and  accumulated  capital, 
which  can  instantly  be  turned  into  money,  to  serve  as  a 
margin  of  security  to  customers.  Mr.  Hankey,  who  is 
excellent  authority  on  that  matter,  thinks  one-third  of  all 
deposits  should  be  held  in  this  form,  as  cash  reserve.  The 
next  step  is  to  accept  the  deposits  of  all  and  sundry  cus- 
tomers who  may  have  accumulated  capital  or  desire  loans 
or  discounts  on  the  security  of  goods.  It  need  scarcely 
be  added  that  the  selection  of  customers,  by  a  bank, 
other  than  those  who  simply  desire  to  leave  in  a  banker's 


BANKS   OF  DEPOSIT  AND   DISCOUNT.  141 

hands  surplus  balances  of  capital,  is  a  matter  of  prime 
importance.  As  a  rule,  with  but  few  exceptions,  a  bank 
should  never  lend  capital,  its  own  or  its  customers',  on 
what  is  known  as  "accommodation  paper."  Commer- 
cial paper  should  always  represent  commodities  in 
course  of  production,  or  in  transit  from  producers  to 
consumers. 

2.  In  the  accounts  established  between  banks  of  de- 
posit and  discount  and  their  customers,  the  banker 
debits  himself  with  his  own  and  his  customers'  capital, 
whether  the  latter  consists  of  accumulated  or  earned 
capital,  or  of  the  "  proceeds  "  of  bills  discounted.  When 
money  is  deposited,  it  simply  counts  as  so  much  trading 
power  in  the  general  mass  of  that  article.  It  is,  however, 
an  asset,  of  which  we  have  seen  a  prudent  banker  will 
take  care  to  have  an  adequate  supply  at  command,  in 
his  own  vaults,  or  at  easy  call.  This  "cash,"  together 
with  the  discounted  securities,  makes  up  the  other  or 
credit  side  of  the  ledger. 

3.  By  this  brief  statement  of  the  organization  of  a 
bank  of  deposit  and  discount,  it  will  be  seen  that  the 
funds  on  which  he  trades  consist :  First,  of  his  own 
capital  (money  being  treated  merely  as  capital).  Second, 
of  the  balances  of  other  people's  capital,  left  with  him  for 
safe  keeping,  on  which  he  may  pay  interest,  a  little  below 
the  market  rate  at  which  he  lends  it,  or  not,  according 
to  the  exigencies  of  customers.  Most  sound  and  well- 
managed  banks  have  a  pretty  large  "  line  "  of  customers 
who  do  not  care  to  tie  up  their  balances  for  specific 
periods,  in  order  to  get  interest  thereon ;  and  on  such  the 
banker  makes  a  clear  net  profit,  without  any  cost  to  him- 
self, by  lending  to  good  customers.  Third,  the  largest 
and  most  important  part  of  the  banker's  trading  fund 
consists  of  the  proceeds  of  bills  representing  goods, 
which  have  been   discounted ;   that  is,  the  interest  has 


142  CURRENCY. 

been  deducted  or  subtracted  from  the  face  of  the  bills, 
and  the  balance  has  been  debited  to  the  banker,  or 
credited  to  the  customer  as  a  deposit  of  capital.  The 
"  discounted  "  interest  forms  also  a  part  of  the  trading 
fund,  being  the  banker's  profit ;  and  the  method  of  get- 
ting paid  in  advance  is  equivalent  to  getting  compound 
interest. 

4.  That  "  mighty  instrument "  the  check,  as  Professor 
Price  expressively  calls  it,  is  the  talisman  by  which  the 
common  pool  of  trading  power,  described,  is  made  availa- 
ble. Though  the  check  purports  to  be  payable  in  cash, 
and  can  at  any  moment  be  convertible  into  cash,  it  is 
only  so  done  in  the  ratio  of  three  per  cent  on  the  gross 
amount  of  trading  power  handled ;  and  of  this,  only 
about  the  half  of  one  percent  is  handled  in  coin.  In 
referring  again  to  this  fact,  it  must  not  be  supposed  that 
I  undervalue  the  offices  of  either  metallic  or  paper  money 
as  tools  of  industry.  This  half  of  one  per  cent  of  trad- 
ing power,  handled  by  bankers,  in  the  shape  of  money,  or 
coin,  is  indispensable  to  a  sound  monetary  system.  It  is 
the  "governor"  of  the  industrial  engine,  and  as  a  meas- 
ure of  value  can  no  more  be  dispensed  with  than  the 
yardstick,  and  measures  of  length  generally,  as  well  as 
of  weight  and  capacity.  But,  in  conceding  these  most 
important  functions  to  money,  let  us  not  undervalue 
trading  power  wielded  by  bankers  through  the  bill  of 
exchange  and  the  check,  in  manner  already  fully  set 
forth.  If  money  corresponds  with  the  governor  of  the 
steam-engine,  trading  power  represents  the  boilers  and 
the  rest  of  the  engine  in  the  mighty  machinery  of  human 
industry ;  and  the  clearing-house  serves,  like  the  safety 
valve,  to  indicate  the  amount  and  pressure  of  steam,  or 
the  force  applied.  It  may  here  be  noted,  that,  when  the 
banker  pays  the  check,  he  credits  himself  and  debits 
the  drawing  customer. 


BANKS   OF   DEPOSIT  AND   DISCOUNT.  1 43 

5.  To  make  the  subject  still  more  vividly  clear,  I  must 
state  what  constitutes  purely  and  simply  a  bank  of  de- 
posit. This  will  separate  the  operations  of  modern  banks, 
so  as  to  show  more  precisely  the  dividing-lines  between 
the  several  kinds.  I  have  sufficiently  explained  (Chap. 
XV.  par.  7)  what  a  bank  of  deposit  and  issue,  pure  and 
simple,  is,  and  will  let  Mr.  J.  B.  McCulloch  state  what  a 
simple  bank  of  deposit  effects.  He  says,  "  When  a  pub- 
lic deposit  bank  is  established,  those  who  make  use  of  its 
services  deposit  with  its  officers  the  money  "  (Mr.  McCul- 
loch means  capital  including  money)  "  they  must  other- 
wise have  kept  at  home,  in  order  to  meet  their  current 
demands  upon  them ;  and  when  the  individual  who  has 
obtained  a  bank  credit  has  a  payment  to  make  to  another 
person  dealing  with  the  bank,  —  and  the  principal  traders 
in  most  towns  in  which  a  public  bank  of  deposit  is  estab- 
lished belong  to  it,  —  it  is  made  by  a  transfer  of  so  much 
credit,  or  bank  money''''  (trading  power),  "from  one 
account  to  the  other ;  and  it  is  only  in  the  event  of  a  per- 
son having  to  pay  money  to  a  stranger,  that  he  has  any 
motive  to  withdraw  his  deposit  from  the  bank.  In  this 
way  the  circulation  of  money  is  rendered  all  but  super- 
fluous for  all  but  the  smallest  payments." 

6.  It  will  be  seen  what  an  immense  utilizer  of  money 
a  purely  deposit  bank,  by  the  use  of  the  check,  can  be 
made ;  but  it  will  also  be  seen  that  its  dealings  are  con- 
fined to  the  one  description  of  capital  resulting  from  the 
profits  of  industry  defined  in  postulate  36,  and  to  actual 
money  in  a  very  limited  degree.  The  discount  of  bills 
is  the  greatest  utilizer  of  money,  as  by  far  the  largest  part 
of  floating  capital  is  derived  therefrom.  Add  to  this  the 
potency  of  the  check,  which,  though  used  to  aid  the 
operations  of  banks  of  deposit,  pure  and  simple,  only 
finds  its  highest  efficiency  in  transferring  and  measuring 
out  trading  power  in  banks  of  discount. 


144  CURRENCY. 

7.  Though  the  business  thus  described  constitutes  by 
far  the  greater  part  of  the  general  business  of  banks  of 
deposit  and  discount,  there  are  other  and  kindred  opera- 
tions to  which  they  devote  themselves  profitably.  Most 
of  such  banks,  through  agents  and  correspondents,  make 
remittances  for  their  customers  by  letters  of  credit,  cer- 
tificates of  deposit,  certified  checks,  and  bills  of  ex- 
change to  all  parts  of  the  country,  and  receive  similar 
remittances,  pay  drafts,  etc.  In  most  large  cities,  and 
more  especially  in  London,  and  many  cities  in  America, 
this  kind  of  business  is  extended  to  foreign  countries, 
and  is  engaged  in  by  all  other  kinds  of  banks. 

8.  Still  further  to  facilitate  the  operations  of  bankers 
and  the  settling  of  commercial  accounts  and  balances, 
both  domestic  and  foreign,  the  next,  latest,  and  perhaps 
most  marvellous  invention  is  the  clearing-house  — 
Balancing-House  would  give  to  ordinary  minds  a  more 
exact  idea  of  the  nature  and  offices  of  these  institutions. 
All  business  men,  however,  know  what  the  clearing-house 
is  ;  but  it  is  only  in  London  where  this  method  of  balan- 
cing accounts  receives  its  highest  development.  When  a 
clearing-house  has  been  established  in  a  town,  a  clerk 
from  each  bank  belonging  to  it  meets  similar  clerks  from 
all  the  other  "  clearing-house  banks,"  and  a  general  ex- 
change of  checks  is  effected  in  a  few  minutes  ;  and  in 
London  the  balances  are  settled  without  the  transfer  of  a 
pound  of  money,  by  each  one  having  balances  to  pay 
drawing  a  check  on  the  Bank  of  England,  where  all 
keep  a  portion  of  their  trading  power,  or  reserve.  This 
plan  of  checking  on  the  Bank  of  England  went  into 
operation  in  1856,  and  now  (1876)  the  annual  clearings 
reach  the  enormous  sum  of  sixty-six  thousand  millions  of 
pounds  ;  or,  put  it  in  dollars,  three  hundred  and  twenty- 
five  thousand  million  of  dollars,  —  a  sum  too  large  for 
the  mind  to  grasp. 


BANKS   OF   DEPOSIT  AND   DISCOUNT.  1 45 

9.  From  what  I  have  shown,  it  has  been  seen  that  the 
business  of  a  bank  of  deposit  and  discount  consists  in 
receiving  the  surplus  and  temporarily  unused  balances  of 
accumulated  and  other  floating  capital  awaiting  more 
permanent  investments,  —  whether  it  consists  of  money, 
checks,  bills,  or  credits  on  other  banks  or  commercial 
houses  of  standing,  —  and  out  of  the  common  fund  of 
trading  power  thus  collected,  to  lend  to  all  customers, 
having  good  security  to  offer,  such  as  bills  founded  on 
goods  being  preferred.  The  "  unused  balances  "  referred 
to,  which  nearly  all  large  customers  who  borrow  generally 
hold  at  their  bankers,  it  will  be  seen,  form  a  considerable 
part  of  a  banker's  reserve  and  discount  fund,  and  become 
an  important  element  in  his  profit. 

10.  In  London,  excepting  the  Bank  of  England,  this 
kind  of  business  is  regarded  as  almost  the  only  legitimate 
as  it  is  nearly  the  universal  system  of  banking.  So  per- 
fect is  the  system,  that,  but  for  the  strenuous  efforts  of 
the  Bank  of  England  to  dominate  the  loan  market  and 
counteract  the  operation  of  the  natural  rate  of  interest, 
there  could  hardly  be  any  thing  to  desire.  As  a  bank  of 
discount,  the  Bank  of  England  stands,  I  believe,  about 
fourth  rate  ;  and  it  is  entirely  within  the  power  of  the 
other  joint-stock  and  private  banking  firms  to  put  a  com- 
plete and  final  end  to  the  power  of  that  institution  by 
the  establishment  of  a  bank  of  deposit,  pure  and  simple, 
wherein  to  keep  their  trading  balances,  and  on  which 
they  shall  all  draw  to  settle  clearing-house  accounts. 
This  bank  might  be  called  "  The  Clearing-House  Bank  ;  " 
and  a  certain  amount  of  the  deposits  might  be  invested 
in  public  securities,  which  would  yield  an  income,  and 
pay  the  expenses  of  management.  It  might  also  perform 
the  offices  contemplated  by  the  "  Check  Bank,"  which 
would  have  been  a  success  had  it  been  started  on  the 
plan  suggested.     The  idea  is  well  worth  the  consideration 


146  CURRENCY. 

of  London  bankers,  if  it  has  not  already  seriously  en- 
gaged their  attention. 

n.  It  will  also  have  been  seen  that  the  issue  of  notes 
is  in  no  way  necessary  to  the  success  of  banks  of  de- 
posit and  discount ;  and  it  is  certain  none  of  the  success- 
ful ones  in  the  kingdom  would  engage  in  the  practice, 
now  that  the  fallacy  as  to  the  profitable  nature  of  the 
business  has  been  demonstrated  by  abundant  experience. 
But,  as  I  have  before  remarked,  the  delusion  still  prevails, 
mostly  in  America,  that  banks  of  issue  sustained  by  gov- 
ernment securities  are  advantageous,  and  necessary  to 
the  industrial  interests ;  and  I  regret  to  find  such  good 
financiers  as  Mr.  Spaulding,  the  father  of  the  Greenback, 
or  National  Currency  Law,  and  David  A.  Wells,  the  able 
advocate  of  free  trade,  and  Edward  Atkinson  of  Boston, 
all  sound  on  the  question  of  trade,  with  the  one  excep- 
tion of  paper  money,  advocating  the  manifestly  unsound 
practice  of  the  nation  connecting  itself  with  and  aiding 
private  parties  to  circulate  government  guaranteed  notes 
for  profit  to  themselves.  If  these  gentlemen  were  not 
national-bank  presidents,  or  otherwise  connected  with 
the  interests  of  those  national  pets,  directly  or  indirectly, 
and,  I  may  add,  were  younger  men,  I  might  hope  for 
their  conversion  to  true  demonstrated  principles.  But 
the  public  mind  of  America  is  gradually  becoming  aware 
that  bankers  ought  not  to  be  the  only  class  favored  with 
the  plan  of  drawing  interest  on  a  good  investment,  and 
having  ninety  per  cent  of  its  value  in  "ready  money." 
The  great  danger  now  is,  that  the  so-called  Greenback 
party  may  push  the  money  question  to  the  argumentum 
ad  absurdum  by  carrying  out  the  "  interconvertible  " 
plan,  and  running  into  wild  extremes  of  inflation. 

12.  As  an  exception  to  the  rule,  in  the  United  States, 
I  wish  to  mention  the  name  of  the  late  John  E.  Williams, 
for  many  years  a  large  shareholder  and  president  of  the 


BANKS   OF   DEPOSIT   AND   DISCOUNT.  1 47 

Metropolitan  National  Bank,  the  largest  in  New  York, 
whose  personal  acquaintance  I  had  the  pleasure  to  have. 
Mr.  Williams  was  a  warm  advocate  for  the  abolition  of 
the  national-bank  circulation  and  confining  it  to  green- 
backs, or  national  legal-tender  notes.  His  writings  on 
the  subject  were  able  ;  and  he  pointed  out  clearly  the 
desirability,  and  the  advantage  it  would  be  to  the  national 
banks,  to  give  up  their  circulation  voluntarily,  and  sell 
their  securities,  on  which  they  can  realize  a  handsome 
profit,  and  use  only  legal-tender  notes.  When  the  silver 
mania  runs  its  course,  possibly  these  numerous  pet  banks 
may  see  in  Mr.  Williams's  self-abnegation  and  patriotic 
course,  and  in  his  powerful  arguments,  that  a  true,  sound, 
and  permanent  monetary  system  is  better  than  one  that 
excites  public  hostility,  and  is  founded  on  a  total  miscon- 
ception of  monetary  principles,  and  of  the  uses  and  offices 
of  paper  money. 

13.  I  ought  also  to  mention  Gen.  F.  A.  Spinner,  late 
United  States  Treasurer,  whose  name  has  been  appended 
to  so  many  hundred  millions  of  the  legal-tender  notes, 
great  and  small,  from  the  inception  of  their  issue,  till  he 
was  forced  out  of  office,  near  the  end  of  President 
Grant's  administration,  by  the  national-bank  influences 
in  Congress.  He  was  always  opposed  to  the  principle 
of  lending  the  public  credit  to  bankers  to  trade  on,  how- 
ever good  security  they  were  able  to  give  in  the  shape  of 
national  bonds. 

14.  Hon.  Mr.  E.  G.  Spaulding,  before  referred  to, 
president  of  a  national  bank  at  Buffalo,  on  the  contrary 
favors  this  plan.  This  gentleman  has,  however,  con- 
tributed a  valuable  work  on  the  "  Financial  History  of 
the  War,"  which  explains  the  origin  of  the  legal-tender, 
or  greenback,  money,  and  the  reasons  for  establishing 
the  national-bank  system,  which  is  a  decided  improve- 
ment on  the  old  State  banks.     This,  and  Mr.  Spaulding's 


148  CURRENCY. 

"Centennial  Address  to  the  Bankers'  Association,"  are 
excellent  works  of  reference  on  the  subjects  of  banking 
history  and  statistics  in  America ;  and  they  embody  the 
opinions  of  many  of  America's  leading  statesmen  on 
the  questions  of  issuing  paper  money,  and  general  bank- 
ing. Mr.  Spaulding's  address  states  the  number  of 
national  banks  in  existence  in  the  United  States  then 
(beginning  of  1S76),  at  2,118,  having  a  paid-up  capital 
of  $505,485,965.  There  were  also  907  chartered  State 
banks  with  a  paid-up  capital  of  $164,366,669.  These, 
and  2,375  private  bankers,  were  //^//-issuing  banks,  show- 
ing a  large  development  of  legitimate  banking.1 


CHAPTER  XVII. 

"the  primary  object  of  paper  money  is  to  supply  a 

better  tool  of  industry  than  metallic  money. 

incidentally  only  can   it   be  properly   treated   as 

TRADING   POWER,    OR    RESOURCES"    {fiOS  filiate  49) . 

i.  I  have,  in  the  last  chapter  but  one,  laid  down  the 
broad,  well-defined  distinction  between  issuing  paper 
money  simply  to  create  trading  power,  or  national  re- 
sources, and  of  using  it  as  a  more  convenient  and  effi- 
cient tool  of  industry.  The  subject  relating  to  the 
"  taking  up  of  loans  "  from  the  public,  by  the  issue  and 
circulation  of  paper  money,  seems  of  importance  to 
those  who  seek,  by^  scientific  methods  of  reasoning,  to 
reach  sound  fundamental  principles.  If  the  position  I 
have  laid  down  in  postulate  49,  placed  at  the  head  of 
this  chapter,  is  well  taken,  its  acceptation  by  economists 
and  legislators  will  lead  to  very  important  results.  If 
the  proposition  is  fundamental  and  true,  it  overthrows  all 

1  The  three  last  paragraphs  were  written  in  1878. 


THE    PRIMARY    OBJECT   OF   PAPER    MONEY.  1 49 

the  past  theories  of  economists  and  statesmen  respecting 
the  primary  end  gained  by  the  use  of  paper  money.  It 
has  hitherto  been  and  is  still  the  universal  theory  that  the 
primary  object  of  such  money  is  to  create  trading  power, 
or  national  resources.  Banks  of  issue  think  of  nothing 
but  the  profit  to  be  derived  from  putting  notes  in  circula- 
tion ;  and  states  have  generally  used  such  money  as 
resources  to  prosecute  wars.  It  has  always  been  consid- 
ered as  a  legitimate  method  of  making  two  pounds  out 
of  one,  or,  as  I  have  expressed  it  elsewhere  in  homely 
language,  as  a  plan  by  which  a  man  "  may  eat  his  cake 
and  have  it  too." 

2.  This  was  not  originally  the  purpose  of  the  inventors 
of  bank  notes,  as  I  have  shown  by  the  practice  of  the 
first  banks  of  issue  before  cited.  It  was  reserved  to 
British  ingenuity  to  enlarge  the  uses  of  bank  notes  by 
granting  the  right  to  issue  them,  to  be  used  as  money, 
to  the  Bank  of  England,  as  a  consideration  for  a  loan 
made  to  the  state.  It  was  due,  however,  to  the  fertile 
mind  of  the  eminent  Scotch  financier,  John  Law,  in  the 
next  generation  to  enlarge  this  fascinating  method  of 
creating  wealth  ;  and  "  Lawism  "  still  clings  to  the  public 
mind  with  as  much  tenacity  as  that  other  delusion,  the 
"mercantile  theory."  If  a  bank  could  lend  its  entire 
capital  to  the  nation,  and  receive  the  current  rate  of 
interest  for  it,  and  be  able  to  recoup  itself  by  taking  up 
loans  from  the  public  on  a  security  susceptible  of  per- 
forming the  office  of  money,  it  is  not  surprising  that 
ingenious  minds  should  presently  seek  to  improve  on  it 
by  issuing  notes  without  having  either  gold  or  securities 
behind  them.  They  argued  that  the  tool  paper  money 
was  so  much  more  convenient  than  the  tool  metallic 
money,  beside  being  so  much  cheaper,  that  the  public 
would  not  stop  to  inquire  particularly  into  the  nice  dis- 
tinctions of  monetary  science.     Law  was  not  so  wild  in 


IS© 


CURRENCY. 


his  theories  as  others,  who  improved  on  them.  It  was 
argued,  that,  if  government  securities  formed  a  good 
basis  for  issuing  paper  money,  lands  and  goods  might 
serve  an  equally  good  purpose.  Thus  the  question  of 
providing  a  better  tool  of  industry  was  treated  as  of  sec- 
ondary importance,  or  altogether  lost  sight  of.  The 
Bank  of  England  still  acts  on  this  false  theory,  otherwise 
it  would  sell  the  government  securities  (^15,000,000) 
in  which  it  has  its  capital  and  "  rest "  invested,  and 
would  let  the  note  issue  rest  on  metal,  as  it  did  in  the 
cases  of  the  banks  of  Venice,  Sweden,  Amsterdam,  and 
Hamburg.  The  national  banks  of  the  United  States 
were  founded  on  the  same  erroneous  principles,  other- 
wise they  would  sell  their  public  securities,  and  trade  on 
greenbacks  and  their  own  capital,  instead  of  on  notes 
founded  on  securities. 

3.  One  of  the  inconsistencies  of  this  theory,  that  the 
proper  office  of  paper  money  is  to  economize  metal,  or 
make  the  issue  of  notes  merely  a  matter  of  profit  to  the 
issuer,  is,  that  banks  alone  should  have  this  advantage. 
Indeed,  Professor  Price  has  attempted  to  show  that  only 
"  private  issuers  "  can  make  a  profit  in  this  way ;  that 
when  the  state  takes  up  loans  by  issuing  notes,  the  pro- 
ceeds of  such  loans  "  are  lost  to  the  nation  "  (see  Chap. 
XIV.).  I  have  already  shown  that  this  is  an  unsup- 
ported inference.  On  it,  however,  is  founded  the  claim 
that  a  bank  may  properly  take  up  loans  from  the  public 
on  the  security  of  its  notes,  but  a  government  may  not, 
for  the  reason,  that,  when  a  government  does  so,  the 
loans  are  consumed,  and  there  is  no  residuum  of  profit 
left  to  the  nation.  Now,  I  am  showing  that  profit  is  only 
a  secondary  consideration,  —  a  thing  to  be  made  subor- 
dinate to  the  higher  and  much  more  important  office  of 
supplying  a  better  tool  than  metallic  money.  But  the 
plan  of  issuing  paper  money  on  government  securities 


THE   PRIMARY   OBJECT   OF   PAPER    MONEY.  151 

is,  in  effect,  to  allow  the  bank  to  raise  government  loans 
on  its  own  notes,  and  lend  the  proceeds  to  the  Govern- 
ment at  the  market  rate  of  interest.  In  other  words, 
the  bank  has  borrowed  its  whole  capital  stock  from  the 
public.  It  is  a  plan  of  organizing  and  starting  a  bank 
without  any  capital  of  its  own.  Hence,  like  a  large  pro- 
portion of  the  American  national  banks,  the  very  notes 
authorized  to  be  issued  on  securities  are  used  to  pay  for 
those  securities.  The  plan  is  a  total  reversal  of  the  postu- 
late I  am  enforcing.  It  makes  profit  the  primary  object 
of  issuing  notes,  while  the  main  office  of  notes  is  wholly 
ignored. 

4.  The  idea  of  substituting  a  certain  quantity  of  paper 
money  for  metallic  money,  which  may  thus  be  sent  abroad 
and  sold  to  foreign  countries  for  other  and  more  profit- 
able articles  of  value,  seems  to  have  taken  a  deep  hold 
on  the  minds  of  even  great  reasoners  like  Adam  Smith, 
Mill,  and  others.  This  method  of  "  making  haste  to 
grow  rich  "  seems  so  fascinating  that  it  is  almost  a  pity 
to  attack  it ;  but  it  certainly  belongs  to  the  same  cate- 
gory in  economic  science  as  the  "mercantile  theory," 
overthrown  by  Adam  Smith  himself.  True  science  can- 
not be  limited  to  national  boundaries ;  and  we  cannot 
permit  other  countries,  scientifically  speaking,  to  take  our 
old  tin  kettles  and  pans  because  we  have  found  out  how 
to  do  without  them.  This  would  be  a  fraud  on  the  whole 
outside  race  of  barbarians.  If  we  have  found  out  a  sub- 
stitute for  money,  we  are  bound  by  honorable  principles 
to  publish  the  recipe  to  all  the  world.  If  we  can  make 
one  pound  or  one  dollar  do  the  work  of  two,  and  can 
extend  the  process  to  millions  on  millions,  all  nations 
should  have  the  right  to  the  secret.  But  this  theory  is 
something  like  that  of  the  Hindoo  idea,  that  the  world 
must  have  something  to  rest  on ;  and  so  the  big  turtle 
was  invented.     If  we  palm  off  our  useless  metal  on  other 


152  CURRENCY. 

nations,  on  what  are  they  to  rest  their  foundations  of 
wealth,  and  what  becomes  of  the  universal  money  we 
have  heard  so  much  of  ? 

5 .  It  is  safe  to  say  that  this  alluring  theory  of  making 
profit,  or  creating  value,  by  issuing  paper  money  has  led 
the  commercial  world  into  all  those  dire  disasters  of  which 
I  have  already  spoken  in  treating  of  banks  of  issue.  It  is 
a  theory  that  lies  at  the  bottom  of  the  fallacy  that  money 
can  be  created  out  of  nothing,  —  that  the  Bank  of  Eng- 
land and  the  national  banks  of  the  United  States  can  turn 
their  investments  in  government  securities  into  money, 
in  order  to  draw  the  interest  on  such  investments  and 
trade  on  the  value  thereof  at  the  same  time.  It  is,  in 
fact,  Lawism  in  all  its  worst  features ;  though  the  idea 
was  invented  before  Law's  time.  It  is,  par  excellence,  the 
root  of  all  the  evils  that  have  grown  out  of  the  uses  and 
abuses  of  the  delegated  prerogative  of  states  to  private 
individuals  and  corporations  to  manufacture  and  emit 
paper  money. 

6.  It  is  hardly  going  too  far  to  claim  that  a  large 
proportion  of  all  the  issuing  banks  established  in  Great 
Britain  and  Ireland  up  to  1844,  and  in  the  United  States 
and  the  British  Colonies  up  to  the  present  time,  have 
had  their  origin  in  the  fallacious  and  tempting  idea  that 
a  man  may,  by  a  single  stroke  of  the  pen,  double  or  very 
largely  increase  his  wealth  by  becoming  a  stockholder  in 
a  bank  of  issue.  In  Great  Britain  a  limitation  has  been 
set  on  such  issues,  which  has  resulted  in  a  vast  expan- 
sion of  the  true  system  of  non-issuing  banks,  which  have 
demonstrated  by  their  success  and  efficiency  that  the 
issue  of  notes  is  not  necessary  or  a  legitimate  office  of  a 
banker.  But  in  the  United  States  a  law  has  been  passed 
setting  no  limit  on  the  issue  of  bank  notes  except  that 
set  by  the  entire  national  debt ;  and  this  Act  is  entitled, 
"  An  Act  to  provide  for  the  Resumption  of  Specie  Pay- 


THE   PRIMARY    OBJECT   OF  PAPER   MONEY.  1 53 

ments,  and  for  a  System  of  Free  Banking."  As  banking 
was  free  before,  it  is  a  manifest  misnomer.  It  should 
have  been  called,  "  An  Act  for  the  Free  Issue  of  Paper 
Money  to  all  Bondholders  of  the  United  States." 

7.  While  the  English  and  American  systems  remain 
what  they  are,  the  really  important  question  to  consider, 
by  professional  economists  and  statesmen,  is,  whether 
private  issuers  can  be  trusted,  in  any  case,  with  "  lump- 
ing "  sums  of  notes,  even  when  guaranteed  by  the  state. 
Mr.  J.  B.  McCulloch  says,  "The  widest  experience  proves 
that  no  man,  or  set  of  men,  ever  had  the  power  to  make 
unrestricted  issues  of  paper  without  abusing  it,  —  that 
is,  without  issuing  it  in  inordinate  quantities.  .  .  .  The 
re-enactment  of  the  restriction  on  cash  payments  at  the 
Bank  of  England,  and  the  rendering  it  perpetual,  would 
have  no  perceptible  effect  on  the  value  of  bank  notes, 
provided  their  quantity  were  not  at  the  same  time  in- 
creased. But  there  cannot  be  a  doubt,  that,  under  such 
circumstances,  it  would  be  increased"  (also  Daniel  Web- 
ster's speeches  quoted  in  the  Appendix). 

8.  The  arguments  adduced  seem  to  me  to  give  the 
coup  de  grace  to  the  claims  set  up  by  a  large  class  of 
economists,  and  a  still  larger  class  of  interested  practical 
men,  in  favor  of  the  plan  of  issuing  notes  on  government 
securities,  which  I  have  shown  is  a  plan  of  having  your 
capital  and  the  value  of  it  in  money  at  the  same  time. 
But  the  same  temptation,  to  use  the  emission  of  notes 
by  the  state,  to  create  public  or  national  resources,  has 
often  led  to  the  most  serious  disasters,  even  worse  than 
in  cases  of  private  issues.  The  old  "  Continental  money  " 
of  the  United  States,  and  the  issues  in  France  a  few 
years  later  (during  the  fever  of  the  great  Revolution)  of 
assignats  and  commandats,  are  examples  of  this  extreme 
fatuity  of  rulers  on  the  subject  of  issuing  paper  money 
to  create  resources.     Until  the  principles  I  am  contend- 


154  CURRENCY. 

ing  for  are  recognized  by  statesmen  and  legislators,  and 
are  made  the  base-work  of  laws  prepared  to  carry  them 
into  effect,  there  never  can  be  a  sound  monetary  system 
in  any  country.  If  neither  private  nor  public  issuers 
have  been  able  to  put  proper  restrictions  on  the  issue  of 
paper  money,  it  is  because  no  properly  constructed  issue 
department  has  ever  been  devised.  The  issue  of  the 
Bank  of  France,  during  late  years,  and  of  the  State  Issue 
Department  of  India,  have  come  the  nearest  to  well- 
regulated  monetary  management  of  any  on  record,  unless 
it  be  those  of  the  first  four  banks  of  issue,  already  several 
times  quoted,  as  they  were  first  organized.  The  cure  of 
the  evil,  if  ever  it  be  cured,  must  be  by  the  removal  of 
the  issue  from  all  temptation,  on  the  part  of  managers, 
whether  public  or  private,  of  using  paper  money  chiefly 
as  a  method  of  creating  either  public  or  private  wealth, 
otherwise  than  for  supplying  a  more  effective  and  con- 
venient tool  than  metallic  money,  into  which  it  must 
always  be  made  convertible  on  demand,  to  steady  its 
market  value,  and  regulate  supply  exactly  to  suit  demand. 

9.  To  effect  this  end,  —  to  afford  adequate  guaranties 
against  the  abuse  of  flooding  the  market  at  one  time, 
and  denuding  it  at  another  time,  of  this  valuable  im- 
provement on  metal,  for  circulation,  —  and  to  insure  con- 
vertibility at  all  times,  the  issuing  board  must  be  wholly 
removed,  alike  from  the  influences  of  bankers  and  mer- 
chants, and  from  the  control  of  the  finance  minister, 
who  is  too  often  tempted  to  tamper  with  the  paper  cur- 
rency, to  meet  emergencies  in  national  affairs,  and  must 
sell  notes  for  metal  only. 

10.  The  fundamental  principle  being  thus  established, 
the  question  arises  as  to  how  an  issue  department  should 
be  constituted  to  meet  the  necessities  of  the  case.  This 
will  be  made  the  subject  of  another  chapter.  Without 
anticipating  what  I  have  to  say  on  that  subject,  I  may 


THE   PRIMARY   OBJECT   OF   PAPER   MONEY.  155 

here  remark,  that  paper  money  issued  by  such  a  depart- 
ment will  cost  traders  and  all  classes  just  as  much  as 
metallic  money,  which  is  the  correct  thing.  Bullion 
dealers,  bankers,  merchants,  and  miners,  the  owners  of 
the  precious  metals,  will  take  them  to  the  money  de- 
partment, as  they  now  take  them  to  the  Bank  of  Eng- 
land, the  mint,  or  to  brokers,  and  will  sell  them  for 
notes  or  for  coin,  as  they  may  need,  each  party  —  the 
state  and  the  owner  of  metal  —  trading  on  market  values 
the  articles  they  have  to  exchange.  Thus  there  will  be 
a  perfectly  self-regulating  or  automatic  machinery  estab- 
lished. There  will  be  no  more  metal  coined  than  is 
needed  by  the  public,  no  more  notes  issued  than  will 
stay  in  circulation,  no  more  metal  taken  to  the  money 
department  than  will  afford  a  profit,  however  small. 
The  equation  of  supply  and  demand  will  find  its  nicest 
equipoise.  The  equilibrium  will  be  as  perfect  as  the  face 
of  the  ocean.  The  waves  and  ripples  will  always  tend 
towards  an  exact  level.  If  a  profit  occurs  to  the  depart- 
ment from  the  issue  of  paper,  it  will  belong  to  the  nation, 
and  not  to  individuals.  The  profit,  it  will  be  seen,  under 
such  a  department,  will  simply  be  an  incidental  circum- 
stance, and  not  a  primary  object.  The  profit  can  only 
arise  from  a  sale  of  a  part  of  the  metal  on  which  I  have 
doubts. 

1 1 .  I  have  now,  I  hope,  demonstrated  by  logical  rea- 
soning the  distinction  between  issuing  and  using  paper 
money,  for  the  purpose  of  affording  a  more  convenient 
and  effective  tool  of  industry,  and  for  creating  trading 
or  national  resources.  When  the  necessities  of  the  state 
or  of  individuals  drive  them,  or  eitlicr  of  them,  into  the 
market  for  loans  to  meet  emergencies,  the  proper  thing  to 
do  is  to  borrow  on  the  best  security  available,  and  at  the 
lowest  rate  of  interest  practicable.  But  science  and 
experience  most   amply  prove  that  the  issue   of  paper 


156  CURRENCY. 

money,  as  a  means  of  raising  loans,  is  wrong.  Practice 
has  always  demonstrated  the  falsity  of  the  theory ;  and  it 
is  time  the  statesmen  of  England  and  America  should 
master  and  settle  this  question,  demonstratively  and 
finally.  The  solution  of  the  problems  of  monetary 
science,  now  so  extensively  agitating  the  industrial 
world,  must  be  sought  in  a  plan  that  will  give  absolute 
freedom  to  the  laws  of  trade,  which  I  have  shown  are 
the  laws  of  nature,  as  active  and  well  defined  as  the  law 
of  gravitation. 

12.  A  class  of  interested  economists,  especially  in  the 
United  States,  for  want  of  a  better  argument  against  the 
issue  of  notes  by  a  national  department,  have  descended 
to  the  small  trickery  of  politicians  in  raising  "  a  cry " 
against  the  practice.  They  cry  out  on  all  occasions, 
"  The  Government  must  not  be  allowed  to  trade,  or  to 
follow  the  business  of  banking."  But  I  have  shown  that 
the  issuing  of  paper  money  is  not  trading  or  banking ; 
and,  by  limiting  its  issue  to  the  offices  of  an  industrial 
tool,  I  have  knocked  this  senseless  cry  to  the  ground. 
The  Government  no  more  trades  by  issuing  paper  than 
by  coining  metallic  money.  This  is  undeniable,  and  I 
challenge  its  refutation. 

13.  M.  Michel  Chevalier,  the  eminent  French  econo- 
mist, has  done  good  service  in  the  cause  of  sound  mone- 
tary and  industrial  science,  by  advocating  the  right  of 
the  state  to  issue  and  possess  the  profit,  whatever  it  may 
be,  of  paper  money.  Two  letters  which  I  had  the  honor 
to  receive  from  him  some  years  ago  on  this  subject  will 
be  found  in  the  Appendix,  and  I  have  great  satisfaction 
in  directing  attention  to  them.  I  also  invite  attention 
to  letters  I  had  the  honor  to  receive  from  Lord  George 
Hamilton,  Under  Secretary  of  State  for  India,  written  at  the 
request  of  the  Marquis  of  Salisbury,  then  Chief  Secretary 
of  State  for  India,  showing  the  satisfactory  working  of  the 


SUGGESTIONS   FOR   STATE   ISSUE   DEPARTMENTS.         157 

India  State  Issue  Department.  The  successful  experi- 
ment suggests  that  the  issue  of  small  notes,  as  low  as  one 
or  two  rupees,  would  immensely  increase  the  success  and 
the  usefulness  of  paper  money  in  India.  It  is  due  to 
the  one  and  two  dollar  greenback  notes,  issued  in  the 
United  States,  that  these  treasury  notes  have  become  so 
popular,  that  the  people  will  not  readily  consent  to  their 
retirement,  and  the  substitution  of  silver,  or  of  bank  notes 
issued  on  securities. 

14.  The  great  evils  of  a  silver  standard  of  value  have 
of  late  led  British  statesmen  to  seek  a  remedy  in  the 
demonetization  of  that  metal  in  India,  except  for  a  lim- 
ited amount  of  subsidiary  coins.  If  the  note  issue  could 
be  enlarged  by  introducing  small  notes,  which  are  par- 
ticularly adapted  to  the  small,  frugal  dealings  of  the 
laboring  and  middle  classes  of  India,  the  profit  inciden- 
tally resulting  from  such  issue  would  probably  make  up 
for  the  depreciation  in  the  market  value  of  silver,  and  the 
disastrous  effects  of  having  a  metallic  circulation  that 
fluctuates  as  violently  as  ever  the  Bank  of  England  note 
did  during  the  long  suspension  of  that  institution. 


CHAFfER  XVIII. 


SUGGESTIONS  FOR  STATE  ISSUE  DEPARTMENTS  IN  GREAT  BRIT- 
AIN AND  THE  UNITED  STATES,  AND  CONSIDERATIONS  CON- 
NECTED   THEREWITH. 

i.  After  the  very  clear  exposition  of  principles  as 
well  as  the  functions  that  would  devolve  upon  an  inde- 
pendent, or  perhaps,  more  correctly  speaking,  scientific, 
money  department,  set  forth  in  the  preceding  chapters, 
it  may  seem  almost  a  work  of  supererogation  to  indi- 
cate  a   method   for  organization.      Besides,  the   details 


158  CURRENCY. 

seem  to  lie  on  the  very  surface.  Already  they  exist  in 
most  countries  which  issue  coined  and  paper  money. 
All  that  is  required  is,  to  bring  the  scattered  elements 
together,  and  construct  a  homogeneous  edifice.  The 
Issue  Department  of  the  Bank  of  England,  and  of  the 
Treasury  at  Washington,  will  furnish  able  and  experi- 
enced men  for  the  management  of  the  note  issue ;  and 
the  respective  mints  can  supply  the  clerical  and  mechan- 
ical forces  for  the  production  of  coin.  All  that  is  there- 
fore required  is,  to  bring  the  whole  —  the  mints  and  the 
issue  of  notes  —  into  one  building,  and  place  them  under 
the  direction  of  a  single  board.  The  laws  needed  in 
each  country  to  bring  about  this  object  would  prescribe 
the  number  of  managers,  and  their  duties,  which  would 
be  automatic. 

2.  The  department  may  be  called  the  "Money"  or 
"  Currency  Department,"  the  latter  being,  strictly  speak- 
ing, the  more  comprehensive  and  expressive  term,  from 
a  scientific  stand-point ;  but  either  is  good,  and  "  Money" 
is  a  more  popular  term.  The  business  that  would  devolve 
on  such  a  department  would  be  very  large,  and  would 
require  commodious  and  separate  buildings.  The  work- 
ing of  the  proposed  automatic  system  will  be  found  more 
definitely  referred  to  in  subsequent  chapters,  explaining 
and  defining  the  principles  and  the  objects  that  will 
be  attained  (Chaps.  XXIV.,  XXV.,  and  XXVI.  in  par- 
ticular). 

3.  It  will  now  be  seen  how  little  there  will  really  have 
to  be  done  to  organize  a  scientific  issue  in  the  two  most 
powerful  industrial  nations,  —  those  whose  foreign,  if  not 
domestic,  commerce  is  the  greatest.  In  France  the 
change  would  be  no  greater;  and,  as  far  as  the  result 
would  affect  the  people,  they  would  not  have  a  prejudice 
to  be  moved  by  the  change.  The  same  coins  and  nearly 
the  same  style  of  notes  would  be  supplied.    The  bank 


SUGGESTIONS   FOR   STATE   ISSUE   DEPARTMENTS.         1 59 

notes  alone  would  disappear ;  and  in  their  place,  in  Great 
Britain,  the  new  note  would  run  something  like  this : 
"The   United  Kingdom  of  Great  Britain   and    Ireland 

promises  to  pay  the  bearer  pounds  in  coin  on 

demand,  at  the  issue  office  of  the  State  Money  Depart- 
ment, or  any  of  its  branches  or  agencies."  In  the 
United  States,  there  will  need  to  be  no  change  from  the 
"greenback."  The  same  plates  may  be  used  as  at 
present. 

4.  The  business  of  the  department  may  be  briefly 
summarized  :  —     , 

First,  To  provide  and  pay  coin  for  all  the  gold  bullion 
offered,  seeing  that  such  coin  is  of  the  specified  fineness. 

Second,  To  provide  and  pay  notes,  of  the  denomina- 
tions specified  by  law,  for  gold  and  silver  to  all  who  bring 
such  metal,  coined  or  uncoined,  to  the  issue  office,  or  its 
branches  or  agencies. 

Third,  To  provide  silver,  and  subsidiary  coins  of  all 
kinds,  and  sell  the  same  to  all  comers  for  gold  or  silver 
coin,  or  silver  bullion,  at  its  market  value,  or  paper  money, 
at  the  option  of  the  parties  applying. 

Fourth,  To  redeem  all  notes  and  silver  and  other  sub- 
sidiary coins  in  gold  coin,  on  presentation  at  the  several 
places  specified  for  that  purpose. 

Fifth,  To  establish  agencies  at  such  important  centres 
of  business  as  experience  shall  indicate. 

Sixth,  To  take  charge  of  all  cash  held  by  the  Bank 
of  England,  or  the  Treasury  Department  of  the  United 
States,  held  for  the  redemption  of  paper  money,  and 
redeem  all  such  paper  money  on  presentation. 

Seventh,  To  receive,  hold,  and  pay  out,  on  check,  all 
sums  of  money,  —  metallic  and  paper,  of  a  specified 
amount,  of  private  individuals  and  joint-stock  associa- 
tions, —  but  paying  no  interest  therefor. 

5.  The  question  as  to  the  policy  of  using  any  part  of 


1 60  CURRENCY. 

the  large  amount  of  coin  that  would  accumulate  in  time 
in  these  departments,  for  the  retirement  of  so  much  of  the 
public  debt,  is  one  involving  very  nice  considerations,  as 
well  as  the  retirement  of  the  present  bank  issues.  In  the 
case  of  the  bank  of  England,  the  Government  would  have 
to  pay  the  bank  the  ^11,200,000  of  old  debt,  and  the 
bank  would  take  up  and  cancel  its  notes ;  or  this  may  be 
done  by  the  new  Issue  Department  taking  all  the  coin 
and  bullion  in  the  Issue  Department,  and  retiring  with 
new  state  notes  the  entire  issue  of  bank  notes,  leaving 
the  bank  in  possession,  of  the  securities  on  which  the 
^15, 000,000  of  notes  are  issued,  and  striking  and  settling 
the  balance.  It  is  only  a  simple  matter  of  account,  re- 
quiring time  and  skill  to  accomplish,  so  as  not  to  change 
the  volume  of  the  currency  or  disturb  values.  The  bank 
will  have  no  demand  for  compensation.  The  present 
arrangement  was  not  intended  to  be  permanent.  It  was 
made  when  the  Government  wanted  means,  and  it  has 
always  had  a  right  to  pay  off  the  debt  at  its  pleasure. 
These  securities  are  now  (May,  1879)  worth  nearly  their 
face  in  gold. 

6.  Whether  the  country  banks  in  Great  Britain  are 
entitled  to  damages  for  being  compelled  to  withdraw 
their  circulation  is  also  questionable.  They  are  in  the 
same  position  of  those  in  America,  which  issued  notes 
before  they  entered  the  national  banking  system,  to  some 
extent  at  least ;  though  the  former  were  not  obliged  to 
furnish  any  securities,  which  the  American  banks  in  most 
states  were, —  such  securities  being  then  state  obligations. 
Such  securities  being  good,  the  banks  putting  them  up 
would  get  back  their  capital  invested  in  them,  to  trade 
on.  They  would  then  do  business  on  sound  principles. 
But  the  settlement  of  these  matters,  probably,  will  not 
form  any  part  of  the  difficulty  in  the  way  of  a  change  for 
the  better.     The  real  question  that  underlies  the  whole 


SUGGESTIONS   FOR   STATE   ISSUE   DEPARTMENTS.         l6l 

money  problem  is,  how  to  overcome  the  blind  prejudices 
of  a  class  of  great  influence  in  the  community,  who  do  not 
wish  to  have  the  present  order  of  things  disturbed.  To 
counteract  this,  is  really  what  has  to  be  done ;  and  this 
can  only  be  done  effectually  by  non-issuing  banks,  and  the 
community  at  large.  In  the  United  States  public  opin- 
ion, at  this  time,  is  nearly  equally  divided  on  the  question 
of  substituting  "  greenbacks  "  for  bank  notes. 

7.  In  Great  Britain  the  currency  is  only  swelled  above 
one  of  pure  metal,  about  ^25,000,000.  In  carrying  out 
the  new  plan,  if  none  of  the  metal  coming  into  the  Issue 
Department  were  to  be  disposed  of,  a  contraction  of  that 
amount  of  the  currency  would  ensue ;  and  to  that  extent, 
at  least,  it  might  be  desirable  to  part  with  the  gold  held 
for  notes,  pari  passu,  with  the  retirement  of  bank  notes 
now  issued  on  securities.  In  America  the  measure  would 
have  to  be  consummated  more  slowly,  to  avert  currency 
disturbances.  The  present  system  might  have  to  be  got 
rid  of,  by  substitution  in  full,  or  nearly  so,  of  the  national, 
or  greenback,  circulation  for  bank  notes.  It  will  be  shown 
hereafter  (Chap.  XXIV.),  that  the  currency  is  still  in 
a  highly  inflated  condition.  How  to  get  an  adequate 
supply  of  metal  behind  the  note  issue,  and  hold  the  whole 
present  volume  of  $650,000,000  in  circulation,  is  a  prob- 
lem requiring  time,  skill,  and  determination  to  accomplish. 
Perhaps  another  great  and  overwhelming  commercial  cri- 
sis may  be  needed  to  sicken  the  people  of  a  system  that 
always  breaks  down  when  stability  is  most  needed. 

8.  With  regard  to  introducing  a  scientific  (which  is 
the  true)  system  of  issuing  and  regulating  the  supply  of 
metallic,  paper,  and  subsidiary  currency,  according  to 
supply  and  demand,  into  the  United  States,  the  large 
amount  of  bank  notes  issued  on  public  securities,  and  the 
small  amount  of  gold  held  by  the  Government  to  sustain 
their  convertibility  into  gold,  interpose  serious  but  not 


1 62  CURRENCY. 

insuperable  difficulties  to  it.  In  the  present  anomalous 
relationship  between  the  Government  and  the  national 
banks,  the  whole  burden  must  necessarily  fall  on  the 
former  to  maintain  specie  payments  in  a  crisis.  It  is  a 
system  in  which  the  Government  has  all  the  responsibility 
and  risk,  and  the  banks  the  lion's  share  of  the  profits  of 
the  issue.  Only  a  portion  of  the  American  people  per- 
ceive the  error  of  this  plan  of  supplying  paper  money. 
They  do  not  take  heed  of,  if  they  perceive,  the  fact,  that 
the  public  at  large  pay  full  gold  price  for  these  bank  notes, 
which  cost  the  banks  only  one  per  cent  "  tax  on  circula- 
tion," and  a  mere  nominal  price  for  fabrication.  When 
this  fact,  and  a  better  knowledge  of  the  advantages  of  a 
circulation  founded  wholly,  or  for  the  greater  part,  on 
metal,  shall  prevail,  there  will  be  no  serious  obstruction 
in  the  way  of  gradually  bringing  about  a  change  that  will 
be  permanent,  because  it  will  be  scientific. 

9.  I  have  pointed  out  the  danger  there  would  be  in 
selling  any  considerable  amount  of  the  accumulations  of 
gold  in  the  Issue  Department,  in  retirement  of  the  public 
debt,  in  consequence  of  the  inflating  effect  such  sales 
would  have  on  the  volume  of  the  currency.  To  the 
extent,  however,  that  the  new  system  would  operate  con- 
traction, I  have  suggested,  as  to  Great  Britain,  such  sales 
might  be  expedient.  In  the  United  States,  I  cannot 
help  regarding  the  volume  of  paper  currency,  which  now 
(May,  1879)  constitutes  a  very  large  proportion  of  the 
actual  circulation  outside  of  the  banks  and  the  treasury, 
too  large,  —  in  fact  dangerously  large,  because  of  the 
vast  amounts  of  deposits,  or  capital  held  on  deposit, 
which  in  crises  will  be  the  first  demand  for  metal.  The 
note-holders,  feeling  that  they  have  the  government  guar- 
anty, will,  for  a  time  at  least,  remain  passive  and  indiffer- 
ent. These  pertinent  considerations  should  all  have  due 
weight  on  the  part  of  currency  agitators.     What  I  would 


SUGGESTIONS   FOR   STATE   ISSUE   DEPARTMENTS.         1 63 

strongly  urge  in  regard  to  the  United  States,  is,  that  a 
gradual  contraction  of  paper  money  should  take  place, 
so  as  to  bring  back  gold  to  the  channels  of  circulation 
without  forcing  the  Government  to  buy  it  by  increasing 
the  interest-paying  debt,  as  Secretary  Sherman,  acting 
on  the  authorization  of  a  law  prepared  by  himself  and 
passed  by  Congress  under  his  dictation,  has  done.  I  pro- 
pose that  the  laws  of  industry  shall  provide  the  means, 
and  then  the  burden  will  fall  equally  on  the  whole  coun- 
try (see  postulate  61). 

10.  There  is  another  circumstance  incident  to  the 
adoption  of  a  single  national  issue  department  which 
may  justify  the  use  of  a  portion  of  the  great  metal  fund 
for  retiring  portions  of  the  national  debt.  There  is  a 
regular  annual  increase  of  business  transactions  in  each 
of  the  two  countries  under  present  consideration,  de- 
manding an  increase  in  the  currency.  We  have  no  right 
to  suppose  there  will  be  a  stop  to  this  increase.  On  the 
contrary,  the  steady  development  of  industrial  pursuits, 
caused  by  improved  methods  of  production  and  trans- 
port, and  the  growth  of  wealth,  lead  to  the  almost  cer- 
tain fact  that  this  demand  will  increase  in  a  considerable 
ratio.  Now,  the  demand  for  more  currency  may  be 
turned  to  account  by  the  sale  of  a  portion  of  the  accu- 
mulating gold,  equal  to  one-half,  or  even  to  the  whole, 
increased  demand  for  currency  for  a  few  years.  There 
will  then  be  no  unnatural  inflation.  It  will  be  a  substi- 
tution of  so  many  notes  for  so  much  gold,  without  dis- 
turbing the  working  of  the  automaton. 

1 1 .  In  the  chapters  treating  of  a  universal  monetary 
system,  I  have  advocated  the  issue  of  notes  as  low  as 
the  lowest  gold  coin.  This  I  hold  to  be  very  desirable 
for  convenience,  and  in  a  scientifically  organized  issue 
department,  worked  automatically,  I  think  the  public 
demand  should  be  complied  with.     If  the  people  don't 


164  CURRENCY. 

want  small  notes,  they  will  not  buy  them,  but  take  metal- 
lic money.  Such  a  department  as  I  have  outlined  will 
completely  set  aside  the  objection  to  small  notes,  be- 
cause every  note  issued  must  be  paid  for  by  metal  at  its 
full  face  value.  Small  notes  are  almost  infinitely  prefer- 
able to  silver  dollars,  the  weight  of  which  is  very  objec- 
tionable. But  give  the  public  the  choice.  If  they  prefer 
silver  dollars,  let  them  have  them.  There  is  nothing  so 
democratic  as  money.  There  is  no  commodity  that  de- 
mands the  application  of  free  trade  so  strongly  as  money, 
and  no  system  can  approximate  perfection  that  does  not 
yield  to  the  idiosyncrasies,  so  to  speak,  of  those  who  use 
this  indispensable  tool.  "  Money,"  says  Adam  Smith, 
"  is  a  commodity  of  which  every  man  is  his  own  mer- 
chant." Then  give  to  each  money-merchant  the  com- 
modity in  such  denominations  and  form  —  metal  or 
paper  —  as  he  requires,  or  fancies  most. 


CHAPTER    XIX. 


SIR  ROBERT  PEEL'S  POSITION  ON  THE  NOTE  ISSUE.  —  MR. 
GLADSTONE  CLAIMS  THAT  IT  BELONGS  TO  THE  STATE 
WHEREIN    THE    ACT    OF     1 844    HAS    FAILED. 

i.  I  do  not  attach  much  importance  to  the  mere  un- 
supported opinions  of  even  the  highest  authorities  in 
economic  science,  or  the  greatest  statesmen.  It  is  only 
when  such  opinions  are  backed  up  by  close  logical  rea- 
soning that  they  can  be  accepted  as  good  conclusions. 
Of  how  much  value  are  the  acts  of  Sir  Robert  Peel,  we 
may  decide  when  we  compare  his  theory  with  his  prac- 
tice, which  I  shall  presently  do.  This,  however,  we  may 
concede  to  him,  that  the  Bank  Act  of  1 844,  putting  an 
end  to  the  unlimited  issue  of  bank  notes,  and  providing 


SIR   ROBERT   PEEL'S   POSITION   ON  THE   NOTE   ISSUE.    1 65 

for  the  ultimate  absorption  of  all  the  country  and  Scotch 
and  Irish  bank  paper  circulation,  by  the  Bank  of  Eng- 
land, and  separating  the  Issue  from  the  Banking  Depart- 
ment of  that  institution,  effected  an  immense  improve- 
ment on  the  old  system.  An  equally  important,  and, 
considering  the  circumstances,  still  greater,  revolution  in 
currency  was  effected  in  the  United  States  by  the  Act 
of  Congress  authorizing  the  issue  of  the  national  legal- 
tender  notes  called  "greenbacks."  Had  the  national 
banking  system  not  been  tacked  on  to  the  currency,  and 
the  issue  of  legal  tenders  been  kept  within  the  limits  set 
by  specie  value,  the  United  States  would  to-day  have 
an  approximately  scientific  and  perfect  system  of  paper 
money. 

2.  The  object  of  the  issue,  in  the  United  States,  was 
to  create  national  resources  :  and  hence  the  finance  min- 
ister, Mr.  Chase  (Secretary  of  the  Treasury),  failed  to 
grasp  the  fundamental  principle,  that  nothing  is  gained 
by  the  nation  or  the  people  by  inflating  a  legal-tender 
paper  circulation  ;  and  the  plan  he  adopted,  of  afterwards 
dividing  the  issue  with  banks,  was  a  blunder  as  serious 
as  that  committed  by  Sir  Robert  Peel,  in  continuing 
the  privilege  to  the  Bank  of  England  to  issue  notes  on 
government  securities,  which  Mr.  Chase  copied,  and  ap- 
plied to  the  national  banking  system.  Nothing  is  more 
true  than  the  fact,  that  neither  statesmen  nor  nations, 
as  a  rule,  can  readily  free  themselves  from  the  tradi- 
tional errors  of  past  generations  ;  and  even  good  thinkers 
and  reasoners  are  prone  to  accept  the  opinions,  princi- 
ples, and  'practices  of  business  men  without  sufficient 
distrust  of  their  soundness. 

3.  That  Sir  Robert  Peel  had  a  very  clear  perception 
of  correct  theoretical  monetary  principles,  is  shown  by 
his  speeches,  and  the  latitude  he  provided  in  the  Act 
of  1 844,  to  enable  the  managers  of  the  bank  to  exercise 


1 66  CURRENCY. 

a  discretion  as  to  the  amount  of  the  notes  they  might 
call  for  and  use  on  account  of  securities.  The  following 
extract  from  one  of  his  speeches,  to  which  my  attention 
has  been  drawn  by  the  eminent  French  economist,  M. 
Michel  Chevalier,  is  proof  of  this  fact. 

"  Some  have  contended,  and  I  am  not  one  to  deny  the  position, 
that  if  we  had  a  new  state  of  society  to  deal  with,  the  wisest  plan 
would  be,  to  claim  for  the  state  the  exclusive  issue  of  promissory 
notes  as  we  have  claimed  for  it  the  exclusive  privilege  of  coinage. 
They  consider  that  the  state  is  entitled  to  the  whole  profits  to  be 
derived  from  that  which  is  the  representative  of  coin  ;  and  that,  if 
the  state  had  the  exclusive  power  of  issuing  paper,  there  would  be 
established  a  controlling  power  which  would  insure,  as  far  as  pos- 
sible, an  equilibrium  in  the  currency." 

It  is  quite  evident  that  Sir  Robert  had  a  deep  convic- 
tion of  the  true  principles  of  monetary  science.  He  had 
examined  the  subject  very  carefully  while  a  member  of 
the  Bullion  Committee  in  1810,  as  a  young  and  rising 
statesman,  and  under  the  able  tuition  of  Mr.  Horner,  who 
prepared  the  report  of  that  committee,  which  embodied 
sound  principles,  and  which  the  majority  of  the  House 
of  Commons  were  incapable  of  understanding. 

4.  Before  citing  his  motives  and  reasons  for  continuing 
the  issue  of  notes  by  the  Bank  of  England,  notwith- 
standing his  very  evident  conviction  that  it  was  not  the 
right,  or  theoretically  the  best  plan,  I  wish  again  to  point 
out  to  the  reader  the  absurdity  of  the  system.  When  Sir 
Robert  introduced  the  Bank  Act  of  1844  to  Parliament, 
we  find  the  Government  owing  the  Bank  ^14,000,000, 
including  the  original  loan  of  ^11,200,000,  for  which  it 
paid  the  current  rate  of  interest.  This  covered  the  whole 
capital  of  the  bank,  and  its  "Rest"  in  addition,  leav- 
ing the  bank  without  any  cash  capital  to  use  as  trading 
reserve,  or  for  a  margin.  Of  course  this  had  been 
going  on  from  the  inception  of  the  bank  in  1694.     But 


SIR   ROBERT   PEEL'S   POSITION   ON  THE   NOTE   ISSUE.     1 67 

the  proprietors  were  applying  for  an  extension  of  their 
charter,  and  all  the  country,  with  a  few  exceptions,  had 
become  inimical  to  the  unrestricted  issue  of  bank  notes ; 
and  Sir  Robert  was  in  sympathy  with  the  people,  and  hit 
on  or  accepted  the  plan  of  limiting  the  issue  to  what  it 
then  was,  and,  accordingly,  prepared  his  bill  so  as  to 
stop  all  issues  immediately  of  all  banks,  except  the  Bank 
of  England,  within  fifty  miles  of  London,  and  author- 
ized the  merging  of  all  lapsed  circulation  in  the  country, 
and  in  Scotland  and  Ireland,  into  that  bank,  expecting 
that  arrangements  would  be  made  by  mutual  consent  to 
absorb  the  whole  gradually,  and  perhaps  speedily.  Since 
then,  however,  barely  a  million  pounds  of  such  circu- 
lation has  fallen  in,  making,  as  elsewhere  stated,  at  the 
present  time,  but  ^15,000,000  as  belonging  to  the  bank, 
out  of  a  total  of  ^30,800,000  notes  issued  in  the  king- 
dom. 

5.  Sir  Robert  Peel,  therefore,  contemplated  a  time 
when  the  bank  would  become  the  owner  of  ^30,800,000 
of  the  public  debt ;  and  the  Act  provides  that  the  bank 
might  then  increase  its  issue  on  notes  to  that  extent. 
This  would  exceed  the  present  paid-up  capital  by  ^19,- 
600,000.  I  wish  now  to  point  out  the  exact  effect  of 
increasing  the  note  issue  to  that  amount, — ^30,800,000. 
It  would  be  simply  to  compel  the  bank  to  use,  accord- 
ing to  its  present  policy,  the  sum  of  ^15,800,000  of  addi- 
tional notes,  issued  on  the  additional  securities  required 
to  be  lodged  in  the  Issue  Department  in  payment  for  the 
same.  This  is  what  has  been  done,  to  an  immense  ex- 
tent, in  the  United  States ;  that  is,  the  national  banks 
have  used  the  notes  to  pay  for  bonds.  But  let  any  man 
of  ordinary  reasoning  powers  examine  this  proposition, 
which  the  Bank  Act,  as  it  now  stands  on  the  statute-book, 
involves,  and  he  will  be  forced  to  the  conclusion,  that 
either  this  will  be  the  result  of  giving  effect  to  the  inten- 


I 68  CURRENCY. 

tions  of  the  framer  of  the  law,  or  else  it  will  compel  the 
bank  proprietors  to  raise  the  sum  in  question  by  the  issue 
of  new  shares,  or  to  change  its  policy,  and  diminish  its 
issue  in  manner  pointed  out  in  Chap.  VIII.  The  pres- 
ent fiduciary  issue  of  ^15,000,000,  resting  on  public 
securities,  already  exceeds  the  entire  bank's  paid-up  cap- 
ital and  rest-fund  together  by  about  a  million  pounds ; 
and,  leaving  out  the  "  Rest,"  it  will  make  the  whole  excess 
up  to  nearly  ^20,000,000.  If  this  is  sound  banking,  then 
it  is  a  method  whereby  banking  capital  can  be  created 
ad  libitum.  This,  then,  is  the  proposition  which  the 
present  Chancellor  of  the  Exchequer  has  intimated  to 
be  the  intention  of  the  present  administration  to  give 
"  more  immediate  effect  to." 

6.  The  following  apology  was  offered  by  Sir  Robert 
Peel  for  not  acting  on  his  convictions  as  to  the  true  prin- 
ciples of  the  note  issue,  stated  in  the  extract  from  one 
of  his  speeches  already  quoted.  "The  true  policy  in 
this  country  is  to  work  as  far  as  possible  with  the  instru- 
ments you  have  ready  at  hand ;  to  avail  yourselves  of 
the  advantages  which  they  possess,  from  having  been  in 
use  —  from  being  familiar  —  from  constituting  a  part  of 
the  habits  and  usages  of  society.  They  will  probably 
work  more  smoothly  than  perfectly  novel  instruments,  of 
greater  theoretical  perfection.  If  we  disturb  that  which 
is  established,  let  us  have  some  good  practical  reason  for 
the  change." 

7.  It  was  lucky  that  Sir  Robert  Peel  found  two  years 
later,  in  the  urgency  of  Messrs.  Cobden  and  Bright  and 
their  following,  "  a  good  practical  reason  "  for  overthrow- 
ing "  old  established  usages  of  society,"  when  he  changed 
front,  and  helped  to  pass  the  Act  repealing  the  "  Corn 
Laws,"  which  broke  down  the  traditional  theories  of  pro- 
tection. But  I  have  shown  that  "  instruments  of  greater 
theoretical  perfection  "  may  be  created  without  "  disturb- 


SIR   ROBERT   PEEL'S   POSITION   ON   THE   NOTE   ISSUE.     1 69 

ing  that  which  is  established,"  in  my  proposal  in  last 
chapter  to  transfer  the  entire  clerical  machinery  of  the 
note  issue,  and  the  management  of  the  mint  and  the 
national  debt,  from  their  present  offices,  where  they 
would  be  no  longer  of  use,  to  the  new  state  department. 
It  is  only  right  to  say,  that  the  real  lion  in  the  path  is 
the  Bank  of  England.  Such  a  suggestion  strikes  at  the 
consideration  and  importance  of  the  bank  managers. 
To  take  away  the  name  of  "  Bank  of  England  note,"  and 
substitute  therefor  the  title  of  "The  United  Kingdom," 
and  to  remove  the  public  deposits,  and  the  management 
of  the  public  debt,  these  gentlemen  would  consider  as 
worse  than  highway  robbery.  That  is  where  the  shoe 
pinches,  and  Sir  Robert  didn't  care  to  tread  on  other 
people's  corns  at  a  time  when  his  fame  and  power  were 
at  the  highest. 

8.  I  have  already  noticed  the  views  of  M.  Chevalier 
on  the  subject  of  the  right  of  the  state  to  issue  the  entire 
paper  money  needed  by  the  people,  and  to  receive  the 
profits.  His  letters  stating  those  views  will  be  found  in 
the  Appendix.  Mr.  Gladstone  expressed  himself  very 
decidedly  on  the  question  under  consideration,  in  1866, 
when  he  introduced  a  bill  into  the  House  of  Commons 
to  indemnify  the  bank  against  the  over-issue  of  notes 
during  the  crisis  of  that  year.  He  declared  emphati- 
cally, as  he  has  always  done  when  acting  on  well- 
grounded  convictions,  "  The  whole  business  of  issue  is  in 
the  state  ;  and,  what  is  more  important,  the  responsibility 
also  belongs  to  the  state."  It  was  not  an  occasion  when 
he  could  give  effect  to  his  words,  or  express  more  expli- 
citly what  he  would  do  if  the  opportunity  should  be  pre- 
sented to  him  for  carrying  out  his  convictions. 

9.  This  being  a  work  on  principles,  I  have  not  felt  it 
necessary  to  quote  mere  opinions  unless  the  reasons  have 
been  advanced  by  their  authors  for  expressing  them.     I 


1 70  CURRENCY. 

regard  monetary  science  as  too  far  advanced  to  rest  on 
mere  empirical  dicta,  or  the  unsupported  dogmas  of  any 
man.  Hence  I  have  not  felt  called  on  to  quote  the 
opinions  of  numerous  and  often  voluminous  writers  on 
the  Bank  Act. 

10.  I  have  conceded  to  Sir  Robert  Peel  the  credit  of 
having,  by  the  Bank  Act  of  1844,  given  to  the  country 
a  greatly  improved  monetary  system,  in  comparison  with 
those  which  had  existed  from  time  immemorial.  His  fail- 
ure, looking  from  the  stand-point  taken  by  him,  was 
clearly  due  to  leaving  it  in  the  discretion  of  the  direct- 
ors to  issue,  and  hold  in  the  Banking  Department,  the 
whole  of  the  so-called  fiduciary  notes,  —  those  issued  on 
securities,  from  which  practice  they  have  never  once 
deviated  to  the  present  time,  —  always  treating  such 
notes  as  cash  in  the  banking  business.  I  pointed  out,  in 
the  chapters  on  the  Bank  of  England,  that  the  law  left  it 
optional  with  the  directors  to  "  diminish  and  increase  " 
such  securities,  and,  pari  passu  therewith,  the  cash  in  the 
Business  Department.  The  real  evils,  therefore,  of  the 
system,  as  carried  out,  are  due  either  to  the  greed,  or 
the  ignorance  and  misconception  of  true  principles,  on 
the  part  of  the  directors.  I  have  shown  what  the  effect 
will  be  if  Lord  Beaconsfield's  government  should  carry 
out  the  intimation  of  the  Chancellor  of  the  Exchequer, 
to  give  immediate  effect  to  the  provisions  of  the  law  for 
merging  the  whole  note  issue  of  the  kingdom  into  the 
Bank  of  England.  Unless  the  bank  changes  its  policy, 
it  will  promptly  issue  the  whole  ^30,800,000  of  notes 
on  securities,  purchased  with  the  notes  themselves  ;  for  it 
cannot  be  supposed  that  the  proprietors  will  assess  them- 
selves about  160  per  cent  on  their  present  shares,  or  by 
the  issue  of  an  adequate  amount  of  new  shares,  to  fur- 
nish capital  wherewith  to  purchase  the  additional  securi- 
ties. 


BANKING   AND   CURRENCY   IN  THE   UNITED   STATES.       171 

11.  I  have  alluded  to  this  point  again,  because  I  have 
nowhere  seen  it  raised,  nor  have  I  anywhere  seen  its 
probable,  I  may  say  certain,  effect  on  the  policy  of  the 
bank  in  such  a  contingency  as  is  alluded  to,  stated. 
The  additional  notes,  issued  on  securities,  or  a  portion 
of  them,  would  no  doubt  go  into  the  channels  from 
which  the  country  notes  were  taken.  Now,  a  large  pro- 
portion of  these  country  and  Scotch  notes  are  for  one 
pound  ;  and  the  bank  only  issues  as  low  as  five  pounds. 
This  would  call  for  an  enlarged  supply  of  sovereigns; 
and  there  would,  hence,  be  severe  periodic  drains  on  the 
bank  for  metal :  and  the  effect  on  the  rate  would  be 
frightful.  We  should  have  a  change  every  few  days,  to 
stop  the  demand  for  metal  in  the  provinces ;  and  the 
whole  trading  community  would  be  kept  in  a  worse  state 
of  uncertainty,  about  the  price  of  capital,  than  they  have 
been  for  the  last  thirty  years.  "Go,"  said  the  Swedish 
chancellor  to  his  son,  "  and  see  with  how  little  wisdom 
the  world  is  governed." 


CHAPTER   XX. 

BANKING    AND    CURRENCY    IN    THE    UNITED    STATES. EVILS 

OF  A  SYSTEM  OF  UNLIMITED  ISSUE  OF  NOTES. CEN- 
TENNIAL ADDRESS.  —  ONE  HUNDRED  YEARS  OF  BANKING 
IN   THE    UNITED    STATES. 

i .  Free  trade  in  respect  to  the  issue  of  paper  money, 
and  protection  to  domestic  industry,  —  the  one  as  funda- 
mentally wrong  as  the  other,  —  have  very  generally  been 
characteristic  of  American  legislation  ;  and  the  two  evils 
still  rival  each  other  in  the  number  and  influence  of  their 
adherents.  In  these  two  important  national  considera- 
tions the  United  States  stands  to-day  about  where  Great 


172  CURRENCY. 

Britain  stood  half  a  century  or  more  ago.  I  am  not 
writing  history,  however ;  and  those  who  desire  informa- 
tion on  this  assertion  must  look  for  it  in  the  records 
of  British  and  American  commercial  legislation.  As  the 
title  of  this  work  implies,  its  object  is  to  state  and  eluci- 
date principles,  and  apply  them  to  existing  institutions 
and  practices,  in  respect  to  monetary  science.  I  shall 
therefore  proceed  to  describe  in  general  terms  the  sort 
of  monetary  system  that  prevailed  in  the  United  States 
for  over  half  a  century  prior  to  the  outbreak  of  the  great 
civil  war  in  1861. 

2.  Concurrently  with  the  disasters  inflicted  on  the  Brit- 
ish public,  referred  to  in  former  chapters,  by  the  unlim- 
ited issue  of  paper  money  and  over-trading  in  the  banking 
business,  and  prior  to  the  Bank  Act  of  1844,  almost  ex- 
actly similar  events  were  happening  in  the  United  States, 
in  perhaps  a  more  aggravated  form,  and  with  more  calam- 
itous effects  on  industry.  These  were  brought  about  by 
the  operation  of  similar  causes,  and  were  stimulated  by 
the  same  class  of  motives,  —  the  desire  to  make  two  or 
three  dollars  out  of  one.  Every  State  in  the  Union  had 
its  own  system  of  banking  laws ;  and  these  enabled  a 
small  coterie  of  persons,  very  generally  seeking  to  create 
salaried  positions  for  themselves,  to  organize  banks  of 
issue,  discount,  and  deposit.  To  start  a  bank,  we  will 
say  with  a  capital  of  $50,000,  which  was  a  very  usual 
amount  outside  of  large  cities,  and  in  many  cases  only 
$25,000,  very  little  actual  cash  capital  was  required  be- 
yond what  was  necessary  to  fit  up  an  office  and  pay  for 
engraving  notes  of  the  most  improved  and  fancy  styles 
of  art.  The  subscribed  capital  was  paid,  in  part  or 
wholly,  by  the  partners  giving  their  notes,  payable  to 
and  indorsed  by  each  other,  at  the  brand-new  bank ;  and 
these  were  afterwards  paid  by  the  notes  of  the  bank 
when  they  were  got  ready,  or  were  renewed  until  the  big 


BANKING    AND    CURRENCY    IN    THE    UNITED    STATES.       I  73 

profits  realized  finally  retired  them.  The  organization  of 
a  bank  on  this  plan  was  often  only  the  work  of  a  few 
days,  which  were  necessary  to  send  some  hundreds  or 
thousands  of  miles  to  get  the  notes  engraved  and  printed, 
and  to  file  the  articles  of  association  at  the  State  capital.1 

3.  Up  to  the  outbreak  of  the  civil  war,  the  right  to 
charter  banks  was  universally  claimed  to  be,  as  it  still  is 
by  a  large  class,  a  "  State's  right."  Prior  to  this  event, 
the  Constitution  of  the  United  States  was  held  not  to 
confer  the  authorization  on  Congress  to  grant  such  char- 
ters, the  Bank  of  the  United  States  being  the  single 
exception  to  the  rule.  The  elasticity  of  this  instrument 
had  never  been  tested,  until  then,  by  so  strong  a  moral 
force  as  the  necessities  of  a  great  war,  involving  the  ex- 
istence of  the  nation.  The  sword  had  to  settle  the  ques- 
tion ;  and  it  did  it  effectually,  as  to  how  far  State's  rights 
overlapped  the  boundaries  of  national  powers  and  inter- 
ests. The  Gordian  knot  having  been  cut  by  the  sword 
of  necessity,  the  present  national  bank  system  sprung 
into  existence,  like  Minerva  from  the  head  of  Jupiter, 
"  full  armed  "  and  irresistible.  But  I  am  getting  ahead 
of  my  subject. 

4.  The  new  bank  having  been  opened,  and  the  talis- 
manic  word  of  "  Bank  "  written  in  large  letters  over  the 
door,  and  a  few  hundred  dollars  in  gold  and  silver  being 
secured,  and  not  unfrequently  exhibited  in  the  window, 
to  add  at  least  the  appearance  of  solidity  to  the  "  insti- 
tution," the  public  were  invited  to  open  deposit  accounts, 
and  accept,  and  use  as  money,  the  new  and  crisp  notes, 
in  exchange  for  labor  and  goods ;  and,  for  want  of  any 
thing  better,  the  public  very  generally  did  accept  them, 
without  questioning  the  ability  of  the  bank  to  pay  them. 

1  These  facts  are  based  on  a  statement  made  to  the  writer  by  the  late  United 
States  Senator,  Hon.  J.  M.  Howard  of  Michigan,  and  had  reference  to  all  the 
Western  States. 


1 74  CURRENCY. 

It  was  a  common  practice  in  various  parts  of  the  coun- 
try for  these  mushroom  banks  at  a  distance  from  each 
other  to  exchange  notes,  to  prevent  their  being  returned 
too  rapidly  for  payment ;  such  reciprocating  banks  thus 
giving  each  other  moral  standing.  The  facilities  for 
rapid  travelling  did  not  so  generally  prevail  at  the  time 
of  which  I  am  speaking  as  at  present ;  and  these  banks 
possessed  wonderful  facilities  for  getting  large  amounts 
of  their  notes  in  circulation,  and  were  not  particularly 
nice  about  having  much  specie  on  hand  to  meet  them, 
if  some  unforeseen  event  brought  them  home  faster  than 
was  agreeable.  On  the  fundamental  principle  laid  down 
by  Mr.  J.  B.  McCulloch,  that  "  the  people  must  have  a 
circulating  medium,"  or  some  kind  of  money,  to  transact 
their  business,  and  as  the  nation  had  made  no  adequate 
provision  for  supplying  such  money,  either  metallic  or 
paper,  they  accepted  the  only  tool  that  came  to  hand 
that  would  serve  the  purpose  of  money. 

5.  That  such  a  system  should  have  prevailed  for  so 
long  a  period,  and  over  nearly  all  the  inland  States,  may 
seem  to  have  been  a  reflection  on  the  intelligence  or 
business  capacity  of  the  American  people.  But  such  a 
charge  would  come  with  a  bad  grace  from*  Englishmen, 
whose  longer  experience  has  failed,  even  yet,  to  master 
the  problem  of  issuing  and  properly  regulating  the  supply 
of  paper  money  so  as  accurately  to  meet  the  demands 
of  industry.  Another  excuse  may  also  be  made  for  the 
United  States,  in  the  matter  of  its  paper-money  system  : 
the  Union,  in  many  things  relating  to  domestic  admin- 
istration, was  scarcely  better  than  "  a  rope  of  sand,"  until 
the  great  civil  war  broke  down  some  of  the  absurd  theo- 
ries about  "  State  rights  "  which  grew  out  of  the  right  of 
States  to  own  and  deal  in  human  beings. 

6.  In  1842,  when  Charles  Dickens  was  on  his  Amer- 
ican travels,  the  currency  troubles,  which  had  culminated 


BANKING    AND    CURRENCY    IN    THE    UNITED    STATES.       1 75 

in  1837  in  the  breaking  of  hundreds  of  these  paper-money 
factories,  had  left  the  Western  and  most  of  the  Southern 
States  without  even  such  indifferent  tools  of  industry ; 
and  no  better  substitutes  had  been  provided  by  these 
sticklers  for  State  rights.  He  observes  in  a  letter  to  one 
of  his  friends,  that  he  had  to  carry  about  with  him  "  an 
uncomfortable,"  and  certainly  an  inconvenient,  amount 
of  gold,  say  ^250,  or  $1,250.  But  his  real  difficulty 
consisted  in  the  total  absence  of  small  change ;  there 
being  nothing  of  the  kind  in  many  localities,  —  especially 
in  Ohio,  —  but  "  shinplaster  "  notes,  as  they  were  called, 
issued  by  local  traders,  as  low  in  denominations  as  ten 
cents.  He  says,  "  Apropos  to  this  golden  store,  consider 
at  your  leisure  the  strange  state  of  things  in  this  country  " 
(he  was  then  in  Ohio) .  "  It  has  no  money,  really  no 
money.  The  bank  paper  won't  pass,  the  newspapers  are 
full  of  advertisements  from  tradesmen  who  sell  by  barter, 
and  American  gold  is  not  to  be  had  or  purchased."  He 
says  he  bought  sovereigns  at  first,  but'  subsequently  was 
unable  to  get  these,  and  was  compelled  to  buy  French 
gold  and  silver  coin.  The  least  odious  terms  used  to 
characterize  the  paper  circulation  were  "Shinplaster," 
"Wildcat,"  V Wolverine,"  and  "Red-dog  money." 

7.  Passing  over  the  period  of  colonial  existence,  and 
the  issue  of  "  Continental  money,"  which  is  full  of  inter- 
est to  the  student  of  monetary  science,  and  pregnant  with 
unheeded  admonitions,  we  find  that  the  issue  of  bank 
notes  in  the  United  States,  which  stood  in  1830  at  $66,- 
628,898,  was  increased  by  the  year  1837  to  $149,185,890, 
or  about  125  percent  in  seven  years.  Then  came  the 
great  commercial  and  financial  crash,  which  led  to  the 
stoppage  of  nearly  every  bank  in  the  Union,  180  of 
which  became  total  wrecks,  including  the  Bank  of  the 
United  States,  which  had  advanced  large  sums,  exceed- 
ing its  paid-up  capital,  on  '  State   securities,  a  large  pro- 


176  CURRENCY. 

portion  of  which  were  afterwards  repudiated.  The  coun- 
try was  only  just  beginning  to  recover  from  these  great 
calamities,  brought  on  by  the  excessive  issues  of  bank- 
paper  currency,  at  the  time  Dickens  was  writing  his 
"American  Notes."  The  losses  from  circulation  alone, 
during  the  five  years  from  1837  to  1842,  were  estimated 
by  statisticians  at  $100,000,000;  and  they  fell  most 
heavily  on  the  portions  of  the  country  and  the  people 
least  able  to  bear  them.  The  losses  to  general  industry 
must  have  been  three  times  the  above  sum,  arising  from 
deposits,  and  the  ruin  brought  on  all  traders  by  a  com- 
plete suspension  of  business.  Crops  lay  unmoved  in  the 
granaries  of  the  farmers,  and  consumers  had  to  pay  exorbi- 
tant prices  for  the  necessaries  of  life.  President  Jackson, 
an  obstinate,  self-willed  political  partisan,  with  a  large 
following  in  Congress,  had  succeeded,  during  his  eight 
years'  administration,  in  preventing  the  adoption  of  any 
measure  by  the  General  Government  to  supply  the  peo- 
ple with  an  adequate  metallic  or  paper  circulation  to 
meet  the  demand  for  paper  currency ;  and  the  whole 
question  was  left  in  the  hands  of  ignorant  State  politi- 
cians, and  for  a  new  crop  of  bank  speculators  to  settle  as 
best  they  might.  In  New  York,  Massachusetts,  and  many 
other  States,  banking  laws  were  passed  to  authorize  the 
issue  of  notes  on  state  and  other  securities,  deposited  in 
the  hands  of  an  officer,  known  as  State  Comptroller,  who 
acted  as  trustee  for  such  banks  as  might  fail,  and  to 
whom  reports  were  required  to  be  made.  This  plan 
was  a  decided  improvement  on  the  systems  that  pre- 
ceded it,  especially  in  such  States  as  had  not  repudiated 
their  obligations.  It  was  copied  from  the  practice  of  the 
Bank  of  England,  from  its  inception  in  1694,  and  after- 
wards was  transferred  by  Mr.  Lincoln's  government  in 
1864  to  the  national  banks,  substituting  national  for 
State  securities.     Banks,  however,  organized  on  the  State 


BANKING   AND   CURRENCY    IN   THE    UNITED   STATES.       I  77 

plan,  were  required  to  redeem  their  notes  in  specie,  and 
afforded,  perhaps,  more  security  to  note-holders  than  the 
States  could  give. 

8.  There  was  this  difference  between  the  State-security 
banks  and  the  national  banks  created  by  Mr.  Lincoln's 
administration.  The  States  did  not  guarantee  the  full 
face  of  the  notes,  as  is  the  practice  of  the  National  Gov- 
ernment in  respect  to  the  national  bank  notes.  If  a  bank 
failed,  the  comptroller  sold  the  securities ;  and,  if  they 
realized  enough  to  pay  all  notes  in  full  and  expenses, 
they  were  fully  paid  :  if  there  was  a  deficiency,  then 
there  was  a  pro  rata  dividend  ;  and  the  notes  were  valued 
in  the  market  accordingly.  As  I  shall  devote  one  or  two 
chapters  to  considering  the  national  banking  system,  I 
will  only  here  remark  on  one  peculiarity,  which  seems  to 
have  been  devoid  of  any  special  object  or  good  purpose. 
It  is  that  which  requires  the  one  kind  of  national  cur- 
rency issued  to  banks  to  be  convertible  into  the  other 
kind  made  legal  tender,  and  issued  directly  to  the  peo- 
ple.    Both  kinds  rest  on  the  same  basis  of  security. 

9.  Mr.  E.  G.  Spaulding,  in  an  address  delivered  before 
the  United  States  Bankers'  Association  at  Philadelphia  in 
1876,  remarks  on  this  kind  of  redemption  as  follows :  — 

"  There  has  been  recently  established  a  Bureau  in  the 
Treasury  Department  at  Washington,  for  the  purpose 
of  assorting  and  enforcing  redemption  of  national  bank 
currency.  This  operation  furnishes  clean  notes  for  those 
that  are  worn  and  defaced,  but  it  is  in  no  sense  an 
efficient  redemption."  In  another  paragraph  of  the 
same  address,  he  says,  "  This  is  practically  no  redemp- 
tion at  all.  It  is  merely  swapping  one  kind  of  paper 
currency  for  another  of  about  the  same  value." 

10.  The  only  difference  between  the  two  kinds  of  notes 
consists  in  the  requirement  that  the  bank  notes  must  be 
redeemed    on    demand    in   the   national   or  greenback 


178  CURRENCY. 

notes.  But  cut  bono  ?  The  national  bank  notes  are 
practically  made  "  legal  tender  for  all  taxes,  and  other 
debts  to  the  Government,  except  principal  and  interest 
on  the  funded  debt ;  the  law  also  makes  them  receiv- 
able by  each  national  bank  for  all  ordinary  debts  due 
them"  (see  same  address,  p.  61). 

11.  Mr.  Spaulding's  Centennial  Address  gives  a  brief 
summary  of  the  progress  of  banking  in  the  United  States 
for  the  first  century  of  the  country's  history,  and  supplies 
a  large  amount  of  valuable  information  of  interest,  espe- 
cially to  those  who  do  not  care  to  wade  through  the 
numerous  works  containing  more  specific  details.  It 
would  be  quite  impossible  to  enter  into  such  historical 
considerations  in  a  work  devoted  mainly  to  the  elucida- 
tion of  principles,  and  their  explanation  and  application 
to  monetary  systems  as  they  exist. 

12.  The  claim  put  forward  by  Mr.  Spaulding  in  this 
address,  and  in  his  valuable  "  Financial  History  of  the 
War,"  that  the  national  legal-tender  notes  ought  to  be 
redeemed,  or  bought  back  by  the  Government  and  can- 
celled, because  he,  in  introducing  the  legal-tender  bill 
into  Congress,  and  others  in  advocating  its  passage,  had 
declared  it  was  to  be  only  a  temporary  "war  measure,"  is 
not  good  logic.  No  doubt  Mr.  Spaulding  did  not  desire  a 
national  system  of  paper  money  to  become  permanent,  as 
it  was  seen  by  him,  as  a  shrewd  banker,  believing  in 
banks  of  issue,  and  by  the  whole  class  of  bankers,  that  it 
would  diminish  pro  rata  the  bank  circulation.  None  of 
these  gentlemen  then  anticipated,  what  has  since  hap- 
pened, that  the  people  would  give  a  preference  to  this 
new  method  of  providing  an  indispensable  tool,  and  that 
they  might  think  that  what  was  good  in  time  of  war  might 
be  good  in  times  of  peace. 

13.  Mr.  Spaulding,  in  speaking  of  the  greenback  cur- 
rency, at  p.  57  of  his  address,  remarks,  "this  currency 


HANKING    AND    CURRENCY    IN    THE    UNITED    STATES.       1 79 

did  not  grow  out  of  industry  and  production,  and  was  not 
therefore  a  legitimate  commercial  currency."  Now,  I 
have  laid  down  in  the  postulates  (54  and  55)  the  self- 
evident  propositions,  that  "  paper  money  only  represents 
and  takes  the  place  of  metallic  money,"  and  that  "  both 
metallic  and  paper  money  represent  value,  and  not  goods, 
labor,  or  other  things  for  which  they  exchange."  It  is 
simply  absurd  to  claim  that  "  money  grows  out  of  indus- 
try and  production."  It  was  invented  to  measure,  and 
"  handle "  (so  to  speak)  as  a  tool,  labor,  goods,  lands, 
and  other  things,  but  more  especially,  perhaps,  trading 
power.  Mr.  Spaulding  has  evidently  fallen  into  the  com- 
mon error  of  confounding  money  with  capital,  or  trading 
power,  a  preponderating  part  of  which  does  "  grow  out 
of  industry  and  production"  (postulate  35).  If  this 
should  meet  his  eye,  I  hope  he  will  frankly  agree  with 
Professor  Price  in  what  he  says  in  respect  to  this  postu- 
late. While  bills  of  exchange,  bills  of  lading,  warehouse- 
men's receipts,  and  other  devices  of  bankers  for  the 
transference  of  debts  and  credits,  do  most  clearly  "  grow 
out  of  industry  and  production,"  money  as  certainly  does 
not.  It  simply  represents  value,  and,  by  its  scale  of  de- 
nominations, measures  the  value  of  other  things.  It  is  a 
common  measure  of  values,  as  the  yardstick  is  of  lengths  ; 
and  these  securities  given  for  goods,  by  being  expressed 
in  such  denominations,  are  turned  into  trading  power  by 
bankers.  Bankers  must  learn  to  make  these  distinctions 
before  they  can  write  clearly  and  intelligibly  on  the  princi- 
ples of  money. 

14.  It  is  this  confounding  of  currency  with  banking  that 
lies  at  the  bottom  of  half  the  popular  errors  on  the  money 
question.  Fortunately  the  public  have  come  to  the  plain, 
practical,  common-sense  view  of  the  purposes  served  by 
the  greenback  currency ;  and  they  are  not  likely  to  give 
up  this  valuable  creation  of  Mr.  Spaulding  and  his  politi- 


l80  CURRENCY. 

cal  co-laborers  who  invented  it.  But  few  people,  outside 
the  national  banking  influences,  believe  that  a  national 
bank  note  "  grows  out  of  industry  and  production  "  any 
more  than  a  greenback ;  and,  though  both  are  guaranteed 
by  the  nation,  the  mass  of  people  have  a  preference  for 
the  latter. 

15.  Again,  the  national  bank  note,  as  it  now  stands 
secured  under  the  law,  "grows  out  of"  a  long  interest- 
bearing  security  on  which  it  rests,  instead  of  on  metal,  and 
is  only  "  bogus  "  money  after  all. 

16.  I  grant  that  the  greenback  has  been  badly  used 
by  its  inventors,  who  now  seek  to  cry  it  down  as  the  "rag- 
baby."  But  the  ill-usage  has  come  from  their  hands.  Its 
good  qualities  have  been  overslaughed  by  the  inflation 
caused  by  an  excessive  issue  of  national  bank  currency. 
But  for  the  over-issues  of  the  latter,  for  which  the  National 
Government  bid  an  enormous  premium  in  the  shape  of 
national  securities,  which  enables  a  corporation  of  bankers 
to  own  a  fine  investment,  and  to  possess  themselves  of  its 
value,  very  nearly,  in  money,  the  "  rag-baby  "  would  have 
been  a  full-grown  giant  long  ago,  and  at  par  with  gold. 
See  next  chapter  about  the  origin  of  this  sobriquet  for 
the  legal-tender  notes.  Mr.  Spaulding  puts  all  the  blame 
on  the  over-issue  of  these  favorite  notes  of  the  people, 
with  how  much  justice  or  consistency  will  appear,  when 
we  take  note  of  the  fact,  that  the  greenback  currency 
antedates  the  bank  currency  by  two  years.  This  sort  of 
disingenuousness  may  do  for  politicians,  but  it  is  inad- 
missible in  economic  science.  As  a  simple,  undeniable 
matter  of  fact,  the  inflation  of  the  paper  money  of  the 
United  States  was  chiefly  due  to  the  enlargement  of  the 
bank  circulation  from  $150,000,000  in  the  loyal  States, 
at  the  beginning  of  the  war,  to  $joo,ooo,ooo  under  the 
natio?tal  bafiking  law  (in  1864),  which  Mr.  Spaulding  so 
much  extols.     The  moment  Mr.  Spaulding  and  all  good 


BANKING    AND    CURRENCY    IN    THE    UNITED    STATES.       l8l 

reasoners  come  to  perceive  that  banking  has  no  connec- 
tion whatever  with  the  issue  of  paper  money,  the  scales 
will  fall  from  their  eyes,  and  they  will  no  longer  "  see  men 
as  trees  walking."  The  Government  gained  nothing  by 
compelling  the  banks  to  buy  public  securities,  which  it 
could  not  have  gained  better,  and  by  an  immense  saving 
of  interest-bearing  debt,  by  issuing  greenbacks  instead 
of  notes  to  loan  to  the  banks  at  one  per  cent  taxation. 
Had  the  national  bank  Act  limited  the  issue  of  national 
currency  to  banks  to  $150,000,000,  the  amount  of  State 
banks'  circulation  at  the  time  the  Act  was  passed,  the  in- 
flation and  depreciation  of  notes  would  never  have  become 
so  great  an  evil. 

17.  I  am  now,  before  parting  with  Mr.  Spaulding's 
theories  about  money,  compelled  to  take  close  and  seri- 
ous issue  with  his  assertion  that  the  true  plan  to  have 
been  pursued  at  the  close  of  the  war  would  have  been 
to  fund  the  whole  $400,000,000  of  greenbacks,  and  of 
course  the  fifty  millions  fractional  currency,  into  a  six- 
per-cent  bond.  He  says,  "  If  the  right  to  fund  the 
greenbacks  into  six-per-cent  gold  bonds  had  not  been 
abrogated,  no  financier  or  practical  business  man,  whose 
opinion  is  worth  quoting,  can  doubt  that  we  would  have 
gone  to  specie  payments  within  two  or  three  years  after 
the  close  of  the  war."  His  expressed  reason  for  this  opin- 
ion is,  that  the  individual  "  indebtedness  in  the  country 
was  but  small."  Now,  with  all  due  respect  to  the  excel- 
lence of  Mr.  Spaulding's  historical  writings,  I  have  to 
say  to  him,  and  those  who  think  as  he  does,  that  the 
possibility  or  impossibility  of  returning  the  currency  to  a 
specie  basis,  in  one,  two,  or  three  years  after  the  war, 
does  not  rest  on  any  maris  opinion.  The  first  thing  to 
be  ascertained  is,  to  what  extent  the  inflated  currency 
had  inflated  the  value  of  labor,  commodities,  and  real 
estate.     Real  estate  was  the  last  to  feel  the  full  force 


152  CURRENCY. 

of  the  stimulus  (as  it  has  been  the  last  to  feel  the  effect 
of  contraction),  and  probably  did  not  reach  its  culmi- 
nating point  of  value,  as  measured  by  legal-tender  notes, 
till  1867,  when  goods  and  labor  had  already  begun  slowly 
to  recede  under  the  upward  turn  in  the  value  of  the 
paper  (then  perceptible),  partly  from  actual  contraction 
by  Mr.  Secretary  McCulloch,  and  partly  by  the  con- 
traction of  increased  demand.  But  as  good  judges  as 
Mr.  Spaulding  have  shown  from  actual  statistics  that  all 
values  except  real  estate  had  doubled  at  the  close  of  the 
war.  Take  labor  as  the  best  gauge  0/  value,  and  we  find 
it  had  risen  from  one  dollar  to  two  dollars  per  day  on 
the  public  works  and  railways.  I  am  adding  to  this 
chapter  in  April,  1878,  when  labor  all  over  the  country 
has  sunk  back,  under  the  slow  contraction  in  the  value 
of  the  currency,  to  one  dollar,  and  paper  money  to  par 
of  gold.  It  is  not  a  matter  of  opinion  at  all,  but  of 
demonstrated  fact,  that,  had  this  contraction  taken  place 
in  one,  two,  or  three  years  after  the  war,  it  would  have 
broken  every  bank  and  trader  in  the  United  States,  end- 
ing most  likely  in  a  great  social  revolution.  This  will 
appear  most  self-evident  when  it  is  considered  that  all 
traders,  including  banks,  trade  on  margins  of  capital  vary- 
ing from  the  stock  speculator's  five  or  ten  per  cent  to  the 
banker's  twenty-five,  thirty,  or  fifty  per  cent.  Let  Mr. 
Spaulding  take  the  deposits  of  his  own  bank,  and  ascer- 
tain whether  he  does  not  regard  what  Mr.  Hankey  sets 
down  as  safe  —  say  about  one-third  its  liabilities  —  as  a 
good  average  margin  to  hold.  He  will  therefore  see,  that 
by  reducing  the  value  of  all  goods,  and  consequently  of 
all  bills  given  for  goods,  from  one  hundred  to  fifty  cents 
in  the  dollar,  in,  so  short  a  period,  would  produce  uni- 
versal bankruptcy.  The  truth  is,  the  entire  trading  com- 
munity in  America,  with  a  very  few  exceptions,  trade  on 
five,  six,  and  up  to  ten  per  cent  only,  of  actual  cash  or 


NATIONAL    BANKING   SYSTEM    OF   THE   UNITED   STATES.    1 83 

immediately  available  capital.    A  man  with  $10,000  seeks 
to  turn  over  $100,000  every  year. 

iS.  Inflation  is  like  intoxication.  Everybody  fancies 
they  are  growing  rich  under  its  delusive  and  flattering 
inspiration.  On  the  other  hand,  contraction  acts  like 
the  effects  of  drink  passing  off,  and  delirium  tremens 
setting  in.  "  No  man,  whose  opinion  is  worth  having," 
can  doubt  the  absolute  truth  of  the  facts  I  have  stated. 
The  country  is  just  now  finding  its  way  out  of  the  inter- 
minable vortex  into  which  the  mistaken  policy  of  those 
who  are  responsible  for  inflation  led  it,  during  and  just 
at  the  close  of  the  war  of  the  great  Rebellion.  The  mon- 
ster of  mistakes  rests  on  their  shoulders,  and  not  on  those 
who  opposed  rapid  and  ruinous  contraction.  It  is  clear, 
that,  had  Mr.  Spaulding's  theory  been  carried  out,  it 
would  have  caused  all  but  universal  bankruptcy. 


CHAPTER    XXI. 


THE    NATIONAL    BANKING   SYSTEM   OF  THE  UNITED   STATES. 

ITS  ORIGIN.  —  GOOD  AND  BAD  FEATURES,  AND  POSITION  IN 
AMERICAN    POLITICS. 

i.  The  monetary  and  financial  systems  of  the  United 
States  occupy  so  large  a  space  in  the  industries  of  the 
world  that  they  require  special  notice  in  this  work.  I 
write  this  chapter  on  the  eve  of  a  great  and  exciting 
presidential  election,  in  which  the  currency  question 
forms  a  conspicuous  element.  On  one  side  stand  the 
combined  forces  of  over  two  thousand  national  banks, 
which  are  nearly  a  unit  in  favor  of  absorbing  the  entire 
legal-tender  note  circulation  ;  and  on  the  other,  a  vast 
conglomeration  of  interests  and  theorists,  from  Governor 
Tilden,  the  Democratic  nominee,  who  rides  two  hobbies 


I 84  CURRENCY. 

at  the  same  time,  —  the  national  bank  and  greenbacks,—* 
and  Governor  Hendricks,  the  proposed  Vice-President 
on  the  same  ticket,  whose  faith  is  in  "  Greenbacks  made 
equal  to  and  convertible  into  gold,"  to  the  class  who 
propose  to  cut  loose  altogether  from  metal,  and  use 
stamped  pieces  of  paper  for  money,  to  be  made  con- 
vertible into  other  stamped  pieces  of  the  same  material, 
purporting  to  bear  interest,  and  these  again  to  be  re- 
convertible  into  the  former  kind,  with  interest  added,  — 
the  interconvertible  system,  in  fact.  But,  in  justice  to 
both  parties,  I  ought  to  say,  they  are  both  more  or  less 
tainted  with  these  wild  theories  ;  though  both  have  a  large 
number  of  sound  thinkers  and  solid  business  men,  who 
agree  with  Governor  Hendricks,  that  a  state  issue  of 
notes,  convertible  into  gold,  is  the  safest,  and,  theoreti- 
cally and  practically,  the  best,  paper  currency  for  the 
country.  I  ought  to  mention  that  a  third  candidate  is 
in  the  field,  —  the  venerable  Peter  Cooper,  who,  like  a 
second  Nestor,  is  wrestling  for  the  greenback  and  inter- 
convertible prize  at  the  age  of  eighty-six.  The  result  of 
this  memorable  contest  will  be  known  before  these  pages 
are  sent  to  the  press ;  but  the  settlement  of  the  money 
question  in  the  United  States,  as  in  Europe,  will  be  de- 
ferred for  many  a  presidential  election  yet  to  come. 

2.  I  have  pointed  out,  in  former  chapters,  that  the 
legal-tender  notes  of  the  Government  were,  like  the  Rev- 
olutionary, or  "  Continental  money,"  issued  to  supply  re- 
sources to  carry  on  the  war.  The  law  authorizing  the 
issue  was  passed  by  the  largely  preponderating  Republican 
party,  under  a  pledge  of  the  Government  that  the  notes 
would  be  retired  and  cancelled  when  peace  was  restored ; 
but  the  Democrats  in  Congress  to  a  man  opposed  its  pas- 
sage, on  the  alleged  ground  of  unconstitutionality.  I  will 
just  observe,  en  passant,  that  the  parties  in  question,  as 
parties,   have   changed   positions   on   this  question.     At 


NATIONAL   BANKING   SYSTEM   OF   THE   UNITED   STATES.    1 85 

least  four-fifths  of  the  Republican  members  in  the  present 
Congress  are  crying  down  their  own  child,  under  the 
sobriquet  of  "the  rag-baby;"  while  about  the  same  pro- 
portion of  the  Democratic  members,  now  in  the  ascend- 
ency in  one  branch  of  the  national  Legislature,  —  the 
House  of  Representatives,  —  as  lustily  cry  out  in  favor  of 
the  infant.  So  much  for  political  party  principle  and 
consistency  in  the  United  States ;  and  so  much  for  the 
opinions  and  knowledge  of  monetary  principles  among 
American  statesmen. 

3.  But,  to  come  to  the  question  under  consideration, 
Mr.  Lincoln's  government  needed  means  to  raise,  feed, 
clothe,  and  put  in  the  field  half  a  million  of  men  ;  and 
Mr.  E.  G.  Spaulding,  aided  by  the  Secretary  of  the  Treas- 
ury, Mr.  Chase,  who  was  "  cudgelling  his  brains  "  for  ways 
and  means,  secured  the  passage  of  the  legal-tender  Act, 
referred  to  at  the  close  of  the  last  chapter,  and  subse- 
quently, in  1S63,  the  national-bank  Act.  The  several 
legal-tender  Acts,  passed  in  1862,  authorized  the  issue,  in 
all,  of  $400,000,000  of  notes  of  one  dollar  and  upwards, 
and  $50,000,000  of  "  fractional  currency"  below  one  dol- 
lar ;  and  the  national-bank  Act,  which  went  into  operation 
in  1864,  added  $300,000,000  more  notes,  to  be  secured 
to  the  Government  by  government  bonds  lodged  in  the 
United  States  Treasury.  When  the  legal-tender  notes 
began  to  be  paid  out  in  rapid  issues,  the  banks  were,  as 
might  have  been  expected,  compelled  to  suspend  specie 
payments.  The  bank  circulation  of  the  loyal  States,  at 
the  time  of  the  passage  of  the  legal-tender  Act,  was  esti- 
mated by  Mr.  Chase  to  be  about  $150,000,000;  and 
these  continued  to  circulate,  under  suspension,  till  the 
beginning  of  1864,  when  the  larger  part  of  the  old  banks 
organized  under  the  national  law,  in  order  to  avail  them- 
selves of  the  opportunity  of  getting  ninety  per  cent  of  their 
investments  in  public  securities  in  national  currency  money. 


I 86  CURRENCY. 

As  the  sole  object  of  issuing  the  legal-tender  or  greenback 
notes  was  to  create  resources,  in  violation  of  the  sound 
principle  I  have  before  laid  down,  that  the  first  object 
should  be  to  provide,  under  proper  limitations,  a  more 
perfect  and  convenient  tool  of  industry,  that  end  would 
have  been  better  reached  by  compounding  with  the  banks 
for  their  circulation,  and  to  have  issued  only  greenbacks 
instead  of  "  national  currency  "  to  banks. 

4.  Prior  to  this  period,  the  experiences  of  the  people, 
especially  in  most  of  the  Southern  and  nearly  all  the 
Western  States,  had  been,  as  I  have  shown  in  the  last 
chapter,  most  unfortunate  in  respect  to  bank  paper 
money ;  and  when  the  greenbacks  were  found  to  answer 
all  the  purposes  of  money,  and  circulated  everywhere  in 
the  country  at  a  uniform  price,  they  became  exceedingly 
popular.  Those  issued  to  the  banks,  though  legal  tender 
for  every  thing  except  certain  dues  payable  to  Govern- 
ment, and  being  also  convertible  into  legal  tenders,  or 
greenbacks,  circulated  on  the  same  level  of  value.  The 
only  distinction  in  principle  between  the  two  kinds  of 
paper  money  was,  that  the  one  was  legal  tender  in  pay- 
ment of  all  debts  and  taxes,  except  customs  dues,  made 
payable  in  coin  (which  exception  lowered  their  market 
value)  ;  and  the  other  kind,  the  notes  loaned  to  the  banks, 
was  legal  tender  only  for  certain  things,  including  all  other 
Government  dues  :  and  the  Government  itself  acted  as 
trustee  for  banks  that  failed.  The  effect  of  this  was,  that, 
after  the  whole  $300,000,000  had  been  issued  to  the 
banks,  the  notes  of  failed  banks  were  eagerly  sought  after, 
and  were  sold  to  new  banks  at  a  premium,  at  one  time  as 
high  as  ten  per  cent.  There  was  also  the  distinction, 
that  the  "  legal  tenders  "  were  issued  directly  to  the  pub- 
lic in  payment  of  supplies,  material  of  war,  salaries,  and 
the  wages  of  all  employees  of  the  State ;  while  the  bank 
notes  were  at  first  issued  in  the  course  of  general  business. 


NATIONAL    BANKING   SYSTEM    OF    THE    UNITED    STATES.    1 87 

After  they  were  in  circulation,  however,  both  kinds  were 
paid  out  and  received  indiscriminately  by  the  Govern- 
ment, the  banks,  and  by  the  public,  except  in  the  one  case 
of  customs  dues. 

5.  The  great  question  before  the  American  people  now 
is,  Shall  the  greenbacks  be  retired  by  the  increase  of  the 
interest-bearing  debt  of  some  $350,000,000 ;  or  shall  the 
national  banks  be  compelled  to  surrender  their  circula- 
tion, which  was  raised  a  few  years  ago  to  $354,000,000, 
on  the  absurd  pretext  of  "equalizing  the  currency"?  as 
if  a  currency  that  circulates  at  the  same  level  of  value 
everywhere  in  the  Union  needed  "  equalizing."  Those 
troubled  with  nice  scruples  about  the  fundamental  law, 
argue  that  the  measure  authorizing  the  issue  by  the  Gov- 
ernment of  legal-tender  notes  was  only  justified  by  the 
exigencies  of  the  war.  "  It  was  a  war  measure  ;  "  and  the 
very  Secretary  of  the  Treasury,  Mr.  Chase,  who  secured 
its  passage,  had  decided,  when  made  Chief  Justice, 
against  the  majority  of  the  court,  that  that  which  was 
barely  legal  in  time  of  war  was  shockingly  illegal  in  time 
of  peace.  But  the  greenbacks  are  still  too  popular  Ao  be 
thus  annihilated  in  this  way,  or  by  act  of  Congress  ;  and 
the  prospects  now  are,  that  the  contest  will  end  in  the 
separation  of  the  greenback-men  from  both  the  old  organ- 
izations, and  that  a  new  party  will  result :  or  that  the 
Democrats  will  capture  Republican  greenbackers,  and 
the  Republicans  will  make  reprisals  on  their  opponents 
by  capturing  the  Democratic  bank-men ;  and  thus  the 
issue  will  be  taken  by  the  present  organized  parties. 

6.  It  is  a  singular  thing  that  no  one  has  yet  raised  in 
the  courts  the  constitutionality  of  the  issue  of  notes  to 
the  national  banks.  The  national  organic  law  author- 
izes Congress  "  to  coin  money  and  regulate  the  value 
thereof,"  but  is  silent  about  the  issue  of  paper  money, 
further  than  to  secure  loans.     No  one,  I  believe,  claims 


1 88  CURRENCY. 

that  notes  issued  in  payment  of  debts  owed  by  the 
nation  are  illegal,  provided  they  are  not  made  "  legal 
tender."  But  there  is  "  a  very  solid  distinction "  be- 
tween the  issuing  of  notes  (which  serve  the  purposes  of 
money)  in  payment  of  Government  expenses,  and  lend- 
ing such  notes  to  the  national  banks  to  trade  on  for  gain. 
If  the  Constitution  does  not  expressly  forbid  this  sort 
of  dealing  between  the  Government  and  the  banks,  the 
principle  is  certainly  fundamentally  wrong.  It  is  so  man- 
ifestly wrong  for  the  Government  to  lend  its  notes  to  one 
class  of  traders,  and  refuse  them  to  all  other  classes  on 
equal  security,  that  a  high  national  court  would  be  justi- 
fied in  declaring  such  relations  to  be  void  on  grounds 
of  public  policy,  irrespective  of  the  silence  of  the  organic 
law  on  the  subject  {vide  extracts  from  speeches  of  Web- 
ster, Calhoun,  et a/.,  in  Appendix). 

7.  Leaving  the  legal  question  where  it  is,  I  will  briefly 
point  out  wherein  Mr.  Lincoln's  administration  failed  to 
meet  the  requirements  of  a  very  nearly  perfect  system  of 
currency.  When  it  was  found  that  the  state  banks'  cir- 
culation stood  in  the  way  of  the  legal-tenders,  the  right 
plan  was  to  compound  for  it,  and,  if  more  paper  money 
was  really  needed,  to  have  filled  the  channels  occupied  by 
the  old  bank  notes  with  additional  greenbacks,  as  before 
stated.  As  a  financial  expedient,  this  plan,  it  is  not  to  be 
doubted,  would  have  saved  to  the  nation  about  the  entire 
$300,000,000  loaned  to  the  banks  on  its  own  interest- 
bearing  securities.  To  put  the  matter  in  plain  English, 
Mr.  Chase  made  the  banks  a  present  of  $300,000,000, 
subject  to  an  annual  tax  of  one  per  cent,  and  raised  the 
amount  by  the  sale  to  the  banks  of  $330,000,000  of  six- 
per-cent  bonds.  But  the  most  serious  blunder  committed 
by  Congress  was  the  authorizing  the  issue  of  so  large  an 
amount  of  irredeemable  paper,  which  shortly  reduced  its 
market  value  at  one  time  to  forty-five  per  cent  of  the 


NATIONAL   BANKING   SYSTEM    OF   THE   UNITED   STATES.    1 89 

face  of  the  notes.  Better  far  to  have  raised  the  ways 
and  means  by  paying  a  higher  rate  of  interest  and  to 
have  held  the  value  of  the  notes  at  par  of  gold  by  limita- 
tion of  volume.  The  effect  of  the  over-issue  was  pres- 
ently felt,  by  a  sudden  rise,  to  double  their  former  prices 
of  all  supplies  for  the  army  and  navy  and  the  wages  of 
all  the  employees  of  the  nation.  The  huge  loans  were 
thus  squandered,  and  the  permanent  debt  nearly  doubled. 
The  theory  acted  on  was,  that,  in  order  to  raise  loans  at 
all,  it  was  necessary  to  diminish  the  trading  power  of  the 
currency,  which  never  ought  to  have  been  regarded  in 
the  light  of  ways  and  means,  except  incidentally,  in  sup- 
plying it  for  convenience  of  use  and  to  meet  an  increase 
in  demand.  The  absurd  theory  was  acted  on,  that  the 
rate  of  interest  must  not  be  made  higher  than  six  per  cent, 
and  that  the  loans  must  be  sold  at  par ;  and,  in  order  to 
sell  them  at  par,  the  market  value  of  paper  money  had 
to  be  reduced  to  fifty  cents  on  the  dollar.  All  this  has 
had  the  effect  of  building  up  the  national  banking  sys- 
tem, and  making  it  master  of  the  Government  and  the 
country,  instead  of  subservient  to  the  nation.  It  is  no 
wonder  that  the  party,  at  one  time  all-powerful,  which 
carried  out  such  a  policy,  should  nqw  be  tottering  to 
its  fall. 

8.  Here  was  the  great  opportunity,  such  as  Sir  Robert 
Peel  regretted  he  did  not  possess,  —  "a  new  state  of 
society,"  in  which  "  a  more  perfect  theoretical  system 
of  currency  "  might  have  been  established  ;  and  the  Gov- 
ernment then  had  a  plenary  power  to  execute  its  pur- 
poses. But  one  of  the  great  obstacles  to  American  Par- 
liamentary Government  is  the  want  of  leadership.  It 
is  a  government  of  juntas  or  committees,  without  the 
necessary  cohesion  of  leading  and  commanding  states- 
men holding  seats  in  the  Houses.  Hence  the  possi- 
bilities of  wise  legislation  seem  to  diminish  in  the  inverse 


1 90  CURRENCY. 

ratio  of  the  increase  in  wealth  and  population.  Wash- 
ington is  a  good  field  for  the  investigation  of  future 
chancellors'  sons  seeking  to  "  see  with  how  little  wisdom 
the  world  is  governed." 

9.  Having  made  these  critical  observations  on  the 
American  system-  of  paper  money  and  banks,  it  is  proper 
to  point  out  some  of  their  good  points.  If  Mr.  Chase's 
currency  measures  fell  short  of  perfection,  they  were 
certainly  a  great  improvement  on  those  they  superseded. 
They  were  born  of  necessity,  "  the  mother  of  inven- 
tions ;  "  and  though  the  legal-tender  notes  were  intended 
simply  as  a  war  expedient,  to  create  resources,  they 
served  the  purpose  of  enabling  the  Government  to  send 
nearly  all  the  gold  in  the  country,  together  with  the 
current  product  of  that  metal,  to  foreign  countries  to  pur- 
chase war-supplies.  So  good  a  purpose  did  the  green- 
back currency  serve,  both  by  enabling  the  Government 
to  use  the  gold  it  had  driven  out  of  circulation,  for 
foreign  purchases,  made  through  traders,  and  in  sup- 
plying the  people  with  a  better  tool  of  industry  than 
any  they  had  ever  had,  the  originators  of  it  may  be  for- 
given for  its  over-issue,  which  discredited  it  at  home 
and  abroad.  Its  popularity  has  not  abated  one  iota  in 
more  than  a  dozen  years,  and  its  opponents  are  chiefly 
those  interested  in  the  national  banks.  The  so-called 
"  Act  to  provide  for  the  Resumption  of  Specie  Payments, 
and  for  a  System  of  Free  Banking,"  was  passed  with  the 
view  of  doing  for  the  national  banks  what  Sir  Robert 
Peel  intended  his  Bank  Act  to  do  for  the  Bank  of  Eng- 
land ;  namely,  to  give  to  these  banks  the  whole  paper 
circulation  of  the  country,  on  Government  securities. 
The  circumstance  that  the  plan  is  predicated  on  the 
perpetuity  of  the  public  debt  is  an  argument  against  its 
correctness.  The  temper  of  the  American  people,  at 
least,  is  not  in  favor  of  a  perpetual  national  debt ;  and 


NATIONAL    BANKING    SYSTEM    OF   THE    UNITED   STATES.     191 

hence  a  banking  system  founded  on  such  a  debt  rests  on 
no  durable  basis.  This  national  antipathy  to  a  perma- 
nent public  debt  arises  from  the  instinctive  distaste  for 
an  aristocracy  of  wealth,  or  of  any  other  kind,  which  they 
have  come  to  connect  with  the  public  debts  of  Great 
Britain  and  European  countries  generally.  I  again  also 
direct  attention  to  the  provision  in  this  "free  banking 
law  "  which  permits  the  formation  of  national  banks  with 
no  other  limit  than  the  whole  national  debt ;  and  it  is 
as  certain  as  the  earth  revolves  round  its  axis,  that  this 
practically  unlimited  issue  of  national  banking  currency 
will  lead  to  new  inflations  whenever  manias  for  bank 
speculations  arise.  The  Act  is  a  thorough  stultification 
of  its  authors,  and  is  most  absurd  in  principle,  and  must 
prove  most  mischievous  in  practice.  The  Act  itself  can 
only  be  regarded,  by  those  who  carefully  examine  its 
principles,  as  a  bonus  offered  by  the  Government  of  the 
United  States  to  speculators  in  paper  money  founded  on 
public  securities,  and  a  premium  on  inflation. 

10.  This  latter  view  of  the  effect  of  the  national  bank- 
ing system  has  not  before  been  noticed  by  writers  on 
the  subject,  and  I  invite  special  attention  to  it.  It  is  a 
powerful  incentive  to  capitalists  owning  United  States 
bonds,  or  having  uninvested  capital,  to  organize  banks 
of  issue.  Thus  a  tendency  is  engendered  to  divert  capi- 
tal from  other  industrial  enterprises,  and  to  maintain  an 
unhealthy  supply  for  banking  purposes.  Only  men  igno- 
rant of  economic  science  will  claim  that  there  cannot  be 
too  much  loanable  capital.  What  is  so  much  clamored 
for,  namely,  "cheap  capital,"  is  very  generally  a  great 
evil,  and  is  indicative  of  bad  times,  cheap  labor,  and  low 
profits.  The  one  condition  is  the  result  of  the  other. 
Men  who  cannot  see  the  force  of  this  reasoning  are  inca- 
pable of  comprehending  the  subject,  and  their  clamor  is 
utterly  unworthy  of  attention.     The  plan  of  governments 


192  CURRENCY. 

paying  bonuses  to  any  branch  of  industry  has  the  effect 
of  denuding  other  branches  of  a  portion  of  the  capital 
that  naturally  belongs  to  them.  If  it  does  not,  why  is 
the  bonus  offered?  Now,  the  result  of  all  such  induce- 
ments to  invest  in  particular  branches  not  only  counter- 
acts the  natural  distribution  of  capital  and  labor,  but 
in  the  long  run  injures  the  laborer.  Adam  Smith  has 
pointed  out  the  damaging  effects  on  industry  of  govern- 
ment bonuses  and  monopolies  with  great  force. 

1 1 .  There  is  another  striking  feature  in  the  national 
banking  system  that  has  not  been  so  conspicuously  urged 
by  otheie  as  its  character  deserves.  It  is  what  I  have 
several  times  referred  to  as  the  result  of  the  Act  for 
the  resumption  of  specie  payments ;  to  wit,  the  provision 
which  does  away  with  the  limitation  on  the  issue  of 
paper  money.  Since  1844  there  has  been  a  complete 
limitation  set  on  the  issue  of  paper  money  in  Great 
Britain  uncovered  by  gold  or  silver.  There  is  not  a 
pound  more  than  when  the  Act  of  that  year  was  passed, 
except  what  is  so  covered. 

It  may  be  questioned  whether  there  exists  any  branch 
of  industry,  or  any  pursuit,  where  the  bounty  principle  is 
so  obnoxious  as  in  the  case  of  banks  of  issue.  It  has 
always  happened,  when  panics  have  broken  out,  that  the 
causes  are  directly  traceable  to  the  overtrading  in  bank 
capital.  These  cyclones  have  ever  been  preceded  by 
low  rates  of  interest  and  overtrading  in  discounts,  and 
are  as  invariably  followed  by  severe  contraction  and  high 
rates  for  loans.  The  last  paragraph  I  have  added,  in 
May,  1879  :  and  I  may  observe,  that,  though  specie  pay- 
ments have  been  reached,  the  rate  for  loans  in  New  York 
ranges  from  two  and  a  half  to  four  per  "cent ;  and  the 
prospect  of  a  definite  settlement  of  the  currency  question 
in  the  United  States  is  as  much  muddled  and  apparently 
more  uncertain  as  to  the  future,  than  ever. 


CURRENCY   AND   BANKING   IN  THE   UNITED   STATES.    1 93 


CHAPTER  XXII. 

CURRENCY     AND     BANKING     IN     THE     UNITED     STATES     MADE 
SUBSERVIENT  TO   PARTY   ENDS  AND   INTERESTS. 

i.  Nothing  is  more  discouraging  to  those  who  seek  to 
establish  true  scientific  principles  as  the  basis  of  currency, 
than  the  efforts  of  partisan  politicians  to  make  political 
capital  out  of  that  which  should,  above  all  other  things, 
be  made  to  yield  to  sound  methods.  I  propose  to 
point  out  in  this  chapter,  written  in  the  latter  part  of  the 
summer  of  1876,  pending  the  canvass  of  the  presidential 
election,  how  the  currency  question  has  been  seized  on 
by  both  parties  to  forward  their  purposes.  I  am  com- 
pelled to  point  out  how  the  President  of  the  United 
States  abandoned  the  principles  he  had  for  many  years 
earnestly  advocated,  because  he  saw,  or  thought  he  saw, 
it  would  promote  the  success  of  his  party.  Being  a 
soldier,  he  might  have  been  excused  for  not  knowing 
much  about  a  question  involving  numerous  difficult  and 
complicated  principles.  But  he  had  evidently  studied 
it ;  and  what  he  did,  he  did  from  purely  partisan  subser- 
viency. 

2.  President  Grant  had  lost  no  opportunity,  from  the 
time  of  his  first  message  to  Congress  in  1869,  till  the 
spring  of  1874,  to  magnify  the  excellence  of  the  green- 
back currency.  In  each  recurring  message  he  made 
special  allusion  to  it,  telling  Congress  it  was  "  the  best 
currency  the  world  has  ever  seen  "  (his  own  words),  and 
urging  the  adoption  of  measures  to  raise  its  value  to  the 
standard  of  gold,  and  to  provide  for  its  convertibility  on 
demand.  Suddenly,  however,  during  the  latter  year,  he 
obtained  new  light,  imparted  to  him,  it  was  said  in  the 
newspapers,  by  Senator  Jones  from  the  great  silver  State 


1 94  .         CURRENCY. 

of  Nevada,  which  resulted  in  his  handing  the  senator 
for  publication  a  memorandum  on  the  currency  question, 
in  which  he  proposed  to  abolish  the  entire  greenback 
circulation,  and  fill  the  channels  then  occupied  by  it  with 
national  bank  notes  and  gold.  His  method  of  accom- 
plishing that  great  feat  was,  to  purchase  $400,000,000 
of  gold  in  Europe  by  the  sale  of  government  securities. 
The  idea  of  waiting  a  few  years  for  its  production  from 
the  mines  of  California  and  other  gold-producing  States, 
was  too  slow  for  the  President's  impetuosity  to  get  rid 
of  "the  best  currency"  in  the  world.  He  never  stopped 
to  consider  what  an  Herculean  task  it  would  be  to  sell 
so  many  bonds  for  nothing  but  gold,  or  what  effect  its 
withdrawal  in  a  short  period  of  time  from  the  European 
bullion  markets  might  have.  But  a  part  of  the  plan  was 
to  pass  laws  that  would  "  turn  the  balance  of  trade  "  more 
strongly  in  favor  of  the  United  States.  If  these  remarks 
should  ever  meet  the  President's  eye,  I  invite  him  to 
read  the  chapters  on  bullion  and  the  balance  of  trade 
(Chaps.  XL,  XII.). 

3.  Nor  did  President  Grant  allude  to  the  large  addi- 
tion that  would  be  made  by  his  proposal  to  the  public- 
interest  debt,  increasing  the  annual  taxation  say,  of  $15,- 
000,000  a  year.  But  such  conversions  are  not  unusual 
among  American  statesmen,  —  especially  on  the  currency 
question.  The  future  historian  will  perhaps  find  ample 
causes  for  the  readiness  with  which  the  President  and 
most  of  his  party  changed  ground  with  their  opponents 
on  the  matter  of  retaining  or  abolishing  the  greenbacks. 
As  in  England,  "a  cry"  to  go  to  the  country  with  on 
each  recurring  presidential  election  is  necessary ;  and  each 
party,  in  convention  or  through  the  party  papers,  gets 
up  one  to  order.  The  Republicans  scented  victory  in 
the  present  bitter  contest,  in  an  alliance  with  the  "  Money 
Powers,"  —  the  national  banks;  and  their  "cries"  were, 


CURRENCY    AND    BANKING    IN    THE    UNITED    STATES.     1 95 

"Hard  Money,"  "Honest  Money,"  and  "Rag-Baby," 
with  "  Democratic  Repudiation  "  thrown  in  as  a  make- 
weight. On  the  other  hand,  a  large  part  of  the  Demo- 
cratic party  have  all  along  formed  a  mine  of  political  cap- 
ital by  an  alliance  with  actual  repudiators  of  public,  if  not 
private,  obligations,  —  a  class  pretty  numerous  in  all 
communities ;  and  the  popularity  of  the  word  "  Green- 
back "  has  come  to  be  the  enticing  cry  of  this  wing  of  that 
once  more  rising  party.  With  them  the  term  means, 
unlimited  issue  of  irredeemable  paper.  Another  Demo- 
cratic "  cry  "  is  sympathy  with  what  they  call  the  "  debtor 
classes,"  who,  they  allege,  have  been  ground  into  powder 
between  the  upper  and  the  nether  millstones  of  the 
"moneyed"  or  "creditor  classes."  This  exposition  of 
the  positions  occupied  by  the  two  great  political  parties 
in  the  United*  States  at  this  time,  September,  1876,  on 
the  currency  question,  will  hereafter  be  read  by  econo- 
mists and  other  investigators  with  the  feeling  that  in- 
spired the  Swedish  chancellor,  when  he  sent  his  son 
to  see  for  himself  "  with  how  little  wisdom  the  world  is 
governed."  The  reader  will  probably  see  the  propriety 
of  my  introducing  this  episode  in  American  politics,  in 
that  it  relates  almost  exclusively  to  the  money  question, 
and  that  the  final  settlement  of  that  question  is  yet  many 
years,  if  not  generations,  off,  both  in  England  and 
America. 

4.  It  has  been  shown,  that  in  the  United  States  the  one 
party  appeals  to  the  power  of  wealth,  the  other  to  that 
of  the  laboring  millions,  for  sympathy  and  support.  This 
is  a  dangerous  issue  to  be  made  in  such  a  country  as  the 
United  States.  It  discards  from  consideration  great  fun- 
damental principles  which  teach  that  capital  and  labor, 
wisely  directed  and  left  free  from  legislative  restraints, 
will  always  harmonize  and  work  together  like  twin  sis- 
ters.    In  civilized  and  industrial  communities   the   one 


196  CURRENCY. 

can  no  more  exist  without  the  other,  than  animal  life  can 
be  sustained  without  air,  food,  and  water,  and,  in  the 
case  of  the  human  race,  than  they  can  do  without  cloth- 
ing, houses,  and  all  the  other  accompaniments  of  civili- 
zation. 

5.  Beside  a  mere  record  of  facts,  I  have  been  led  to 
make  these  statements,  which  are  historically  and  literally 
true,  not  because  American  politicians  are  worse  than  the 
average  public  men  of  England  or  other  countries,  who 
are  not  over-scrupulous  how  they  rise  to  power,  but  to 
show  how  desirable  it  is  to  have  the  money  question 
definitively  settled,  and  taken  out  of  the  whirlpool  of 
party  politics  and  all  interested  business  influences.  This 
most  desirable  object  can  only  be  attained  by  a  general 
agreement  among  the  educated  and  thinking  men  of  all 
parties,  and  combining  on  a  correct  theory  as  to  the  real 
offices  of  money,  metallic  and  paper,  and  adopting  some 
method  that  shall  leave  the  natural  laws  to  indicate  and 
accurately  serve  out  an  adequate  supply  of  both  kinds  to 
meet  the  actual  demands  of  industry. 

6.  In  Great  Britain  the  omnipotence  of  Parliament 
alters  and  changes  the  unwritten  constitution  ;  and  an  Act 
of  Parliament,  passed  and  acquiesced  in  by  the  people, 
settles  such  questions  as  the  issue  of  currency,  and  almost 
every  thing  else,  as  far  as  any  human  concerns  can  be 
definitely  settled.  In  the  United  States  little  if  any  thing 
short  of  an  amendment  of  the  Constitution,  which  though 
a  solemn  is  a  tedious  proceeding,  affords  any  assurance 
that  what  is  done  one  year  will  not  be  undone  the  next 
year.  This  is  a  very  difficult  process  with  nearly  equally 
divided  parties.  Party  interests,  in  the  United  States,  very 
generally  overtop  national  interests  or  considerations  of 
patriotism.  But  possibly  this  currency  question  may  yet 
find  its  solution,  and  more  definite  if  not  permanent  set- 
tlement, by  an  amendment   of  the  organic   law  of  the 


CURRENCY   AND    BANKING   IN   THE   UNITED   STATES.     IQ7 

nation.  Congress  at  this  time  having  one  party  in  the  as- 
cendency in  one  House,  and  the  other  party  in  the  other, 
seems  powerless  to  effect  any  settlement  whatever.  Both 
candidates  for  the  Presidency  are,  by  antecedent  associa- 
tions and  utterances,  in  favor  of  surrendering  at  discretion 
to  the  national  bank  influences,  and  to  give  the  whole 
paper  currency  to  those  banks ;  but  a  powerful  counter- 
acting influence  is  at  work  against  this  policy  in  the 
popular  branch.  I  have  before,  through  influential  journals 
in  the  United  States,  suggested  to  the  people  the  desira- 
bility of  agitating  the  question  of  an  amendment  to  the 
Constitution,  to  authorize  and  make  it  obligatory  on 
Congress  to  create  by  law  a  National  Issue  Department, 
clothed  with  discretionary  power,  within  prescribed  limits, 
to  have  charge  of  the  coinage  of  metallic  money  and  the 
issue  of  paper  money,  in  manner  suggested  in  the  chapter 
on  a  State  Issue  Department. 

7.  The  plan  of  lending  notes,  at  one  per  cent  tax  on 
the  circulation,  is  so  evidently  unconstitutional,  and  con- 
trary to  public  policy,  that  it  must  sooner  or  later  come  to 
an  end  by  continued  agitation  of  the  question  among  the 
masses  of  the  people.  Moderate  men,  of  all  shades  of 
politics,  would  do  well  to  sustain  a  plan  for  a  change  in 
the  fundamental  law  of  the  nation.  Questions  of  this 
kind  become  dangerous  elements  in  governments  when 
left  alone  too  long.  Just  now  the  entire  influential  press 
of  New  York,  of  both  sides  of  politics,  have  closed  their 
columns  against  those  who  favor  a  continuance  of  a 
national  paper  currency,  though  issued  on  a  gold  basis 
by  and  for  the  nation.  These  journals,  one  and  all,  do 
nothing  but  cry  out,  "rag-baby,"  "rag-baby."  In  the 
West,  nearly  all  the  press  is  in  favor  of  the  "rag-baby," 
and  opposed  to  the  bank  theory  of  currency  ;  and  the 
question  seems  to  be  taking  sectional  ground.  I  have 
already  pointed  out   the   dangerous   theories  that   have 


198  CURRENCY. 

taken  deep  root  in  the  West  and  South,  where  I  have  had 
many  personal  opportunities  to  learn  the  state  of  public 
opinion.  The  desire  to  have  a  new  era  of  inflated  values, 
by  an  excessive  issue  of  inconvertible  paper  money, 
seems  to  be  at  the  bottom  of  the  agitation  in  all  parts  of 
the  South  and  West  that  I  have  lately  visited.  It  is  not 
difficult  to  foresee,  that  the  bigotry  of  journalism  referred 
to  tends  to  foment  a  much-dreaded  evil  in  the  American 
body  politic,  —  another  sectional  schism. 

8.  One  of  the  phases  of  the  money  question,  which  has 
its  serious  as  well  as  ludicrous  sides,  is  the  tendency  that 
its  incessant  discussion  by  mere  charlatan  writers  and 
speakers  is  the  one  already  alluded  to  as  fostering  com- 
munism. There  are  numerous  cheap  weekly  journals, 
extensively  sold  and  read  throughout  the  whole  country, 
whose  sole  object  is  to  foment  the  (so  called)  conflict 
between  capital  and  labor.  The  one  idea  put  forward,  is 
to  influence  the  election  of  members  to  the  various  legis- 
latures and  the  national  Congress  favorable  to  the  passage 
of  laws  aimed  directly  at  the  rights  of  property.  These 
philosophers,  not  content  to  leave  the  natural  laws  to 
regulate  the  price  of  labor  and  commodities,  aim  at  im- 
posing restrictions  of  all  kinds  on  all  industries  not  in 
sympathy  with  the  particular  class  to  which  they  belong. 
I  hope  and  believe  that  the  body  politic  in  the  United 
States  possesses  sufficient  cohesion,  and  that  there  is 
enough  wisdom  and  moderation  left  in  it,  to  settle  these 
questions  on  some  satisfactory  basis.  The  costly  lessons 
of  one  great  civil  war  should  be  sufficient,  at  least  for  a 
century,  to  admonish  public  men  of  all  parties  not  to  press 
for  extreme  measures  calculated  to  keep  up  sectional 
jealousies  and  hatreds  of  any  kind. 

9.  The  issue  of  paper  money  is  still  regarded  by  nearly 
all  public  and  business  men  in  the  United  States,  as  it 
was  in  Great  Britain  till  the  passage  of  the  Bank  Act  of 


CURRENCY   AND    BANKING   IN   THE   UNITED   STATES.     1 99 

1844,  from  the  one  stand-point  of  creating  trading  capital. 
The  idea  of  producing  a  better  and  more  convenient  tool 
of  industry  than  metallic  money  hardly  ever  enters  into 
the  discussion  of  monetary  topics.  The  cry  is  for  "  more 
money,"  when  there  is  too  much  paper  money  already, 
and  what  is  needed  in  reality  is  more  capital.  The  cir- 
cumstance that  modern  banking  has  turned  into  avail- 
able trading  capital  goods  in  course  of  production  and 
transit  to  consumers  is  overlooked,  just  as  is  the  great 
fundamental  truth  that  only  a  limited  amount  of  actual 
money  is  needed  for  industrial  purposes.  As  a  proof  of 
this  proposition,  —  self-evident  to  good  logicians,  —  I  de- 
sire to  point  out  the  fact,  that,  during  the  universal  cry 
for  "  more  money  "  raised  by  a  large  class  all  over  the 
country  in  the  years  1875  and  1876,  there  has  been  a 
voluntary  surrender,  by  national  banks  reducing  their 
circulation  and  getting  back  and  selling  their  securities, 
of  over  forty  million  dollars  ;  thus  showing  conclusively 
that  there  was  too  much  money,  —  more  than  the  people 
needed  or  would  buy,  and  more  than  was  profitable  to 
the  banks  of  issue.  During  periods  of  industrial  stagna- 
tion, resulting  from  preceding  periods  of  inflation  in 
business  and  over-production,  people  always  complain 
of  "  hard  times,"  of  "  scarcity  of  money,"  and  so  on. 
The  Government  is  very  generally  then  held,  somehow 
or  other,  to  be  responsible  for  the  cause  of  these  great 
public  evils.  I  am  free  to  admit  that  unsound  legislation 
has  much  to  do  with  the  causes  of  periodic  crises  in  the 
industrial  world.  Laws  that  interfere  with  the  free  action 
of  the  natural  laws  no  doubt  produce  spasms  in  the  in- 
dustries of  the  people  which  never  would  be  perceptible 
but  for  these  artificial  restraints  set  on  industry. 

10.  It  will  have  been  seen,  by  those  who  have  fol- 
lowed my  course  of  reasoning  on  this  subject,  that  I 
propose  to  have  perfect  free  trade  in  money  as  well  as 


200  CURRENCY. 

in  all  industries,  as  far  as  is  practicable,  with  a  due  re- 
gard to  the  levying  of  taxes  to  support  the  Government 
and  other  local  administrations.  In  respect  to  money, 
the  only  tax  on  it  admissible,  in  a  true  theory,  is  the  cost 
of  production  and  management.  When  more  metallic 
money  is  needed,  it  will  be  indicated  by  a  rise  in  the 
exchange  value  of  money,  —  that  is,  the  price  of  metallic 
money  will  rise  sufficiently  above  the  market  value  of 
bullion  to  cause  the  owners  of  bullion  to  take  that  article 
to  the  mint,  or  the  money  department,  and  sell  it  for 
money.  On  the  other  hand,  if  the  price  of  money  falls 
below  the  market  price  of  bullion,  the  occurrence  will 
immediately  make  itself  known  by  the  fall  in  the  ex- 
change value  of  metallic  money.  The  latter  will  soon 
begin  to  be  sent  abroad,  or  be  put  into  the  melting-pot. 

ii.  I  have  before  stated  these  phenomena  in  the  phi- 
losophy of  metallic  money  more  than  once,  and  again 
revert  to  the  subject  as  one  that  American  public  men 
have  not  generally  considered.  It  lies  at  the  very  thresh- 
old of  any  sound  system,  and  therefore  will  bear  repe- 
tition. Then,  as  to  paper  money,  let  the  state  —  by 
which  I  mean  the  nation  —  supply  all  that  the  people 
(through  bankers,  brokers,  and  traders,  or  otherwise)  re- 
quire, and  are  willing  to  pay  for  at  the  full  metallic  value, 
and  no  more.     This  is  free  trade  in  money. 

12.  I  have  perhaps  already  said  enough  about  the  in- 
cidental use  of  a  part  of  the  metallic  money  that  may  be 
paid  to  or  be  coined  by  the  money  office.  Only  ample 
experience  (such  as  the  Bank  of  France  alone,  of  all  the 
issue  offices  of  the  world)  can  determine  how  much  of 
the  accumulation  of  metallic  money  may  be  used  and 
sold  as  capital,  without  disturbing  the  equilibrium  of 
values.  This  well-managed  issuing  bank,  it  is  thought 
by  many,  holds  quite  an  unnecessary  amount  of  metal  on 
hand ;  and  if  it  held  only  coined  money,  instead  of  a 


CURRENCY    AND    BANKING    IN    FRANCE.  201 

large  supply  of  the  raw  materials,  half  of  the  seventy  or 
eighty  millions  sterling  held  by  it  would  serve  every  pur- 
pose of  the  convertibility  of  its  notes.  But,  as  I  have 
before  said,  this  may  be  a  violation  of  natural  principles, 
which  I  am  always  ready  to  respect. 


CHAPTER   XXIII. 

CURRENCY  AND  BANKING  IN  FRANCE. — THE  BANK  OF  FRANCE. 

i.  In  no  country,  perhaps,  in  the  world  have  the  de- 
lusions respecting  the  availability  of  paper  money  for  cre- 
ating wealth  taken  deeper  hold  of  the  public  mind  than 
in  France,  at  various  periods  and  in  many  forms.  The 
epochs  of  these  delusions,  however,  were  not  so  numer- 
ous as  in  Great  Britain  and  the  United  States ;  but  they 
present  the  subject  in  its  most  serious  as  well  as  most 
ludicrous  aspects.  The  state  of  public  feeling,  and  the 
madness  of  all  classes,  when  the  eminent  Scotch  finan- 
cier, John  Law,  was  at  the  height  of  his  glory  in  Paris, 
rivalling  the  king  himself  in  the  magnificence  of  his  re- 
ceptions, has  never  been  reached  in  any  other  country, 
or  during  any  other  popular  mania  in  France.  I  assume 
that  the  reader  has  made  himself  familiar  with  that  mar- 
vellous mania  in  French  society,  when  the  highest  mem- 
bers of  the  most  ancient  and  proud  nobility  of  Europe, 
of  both  sexes,  patiently  awaited  the  arrival  of  the  great 
man  at  his  grand  reception  hall,  to  beg  for  shares  in  his 
vast  paper  scheme  known  in  after-times  as  the  "  South 
Sea  Bubble."  Mr.  Charles  Mackay  has  given  quite  a 
melodramatic  turn  to  Law's  remarkable  success  in  stir- 
ring up  the  lowest  depths  of  avaricious  greed,  and  his 
account  of  the  matter,  in  that  very  readable  and  instruc- 
tive work,  "  Popular  Delusions."     But  when  the  bubble 


202  CURRENCY. 

burst,  and  brought  ruin  on  all  concerned,  "  none  was 
found  so  poor  to  do  him  reverence  ;  "  and  it  required  the 
whole  power  of  the  king,  who  had,  as  he  thought,  im- 
proved on  Law's  theories  of  finance,  to  protect  him  from 
mob  violence. 

2.  Though  the  ruin  in  which  Law's  paper-money  scheme 
involved  immense  numbers  of  the  wealthy  bourgeois  and 
of  the  ancient  nobility,  left  a  deep  and  lasting  impression 
on  the  public  mind,  the  idea  that  a  man  or  a  nation  may 
possess  valuable  property,  and  at  the  same  time  utilize 
its  market  value  by  means  of  paper  money  representing 
it,  just  as  the  Bank  of  England  and  the  United  States 
national  banks  seek  to  do  with  respect  to  government 
securities,  continued  to  have  its  zealous  believers.  Hence, 
when  the  French  Revolution  was  in  progress  in  1792  and 
1 793,  the  assignats,  which  were  notes  secured  on  lands  and 
real  property  confiscated  from  the  nobles  and  the  Church 
and  owned  by  the  State,  were  proclaimed  to  be  the  real 
solution  of  the  money  question  of  the  day.  But  the  his- 
tory of  this  paper  bubble,  and  that  of  the  commandats 
which  followed,  and  took  the  place  of  the  assignats,  are 
too  well  known  to  need  further  allusion.  They  simply 
proved  the  fundamental  error  of  investing  your  capital  in 
things  having  market  value,  and  possessing  yourself  of 
that  value  in  money.  These  French  monetary  experi- 
ences, however,  must  have  produced  a  more  profound 
and  lasting  impression  on  the  minds  of  French  states- 
men than  on  those  of  most  other  countries ;  for  France 
has  not  since  been  a  good  field  for  speculations  in  banks 
of  issue,  and  has  long  tolerated  only  one  such,  —  the 
Bank  of  France.  Thus  she  has  been  exempt  during  the 
whole  of  the  present  century  from  those  numerous  over- 
issues of  paper  money  which  so  frequently  culminated 
in  national  disaster,  through  unlimited  competition  among 
hundreds  and  thousands  of  issuers  in  Great  Britain  and 
America  during  the  same  period. 


CURRENCY  AND  BANKING  IN  FRANCE.       203 

3.  After  the  assignats  and  commandats,  came  hard 
money,  supplemented  by  occasional  issues  of  what  may 
be  termed  treasury  notes  for  temporary  expedients,  until 
the  Bank  of  France  came  into  existence  in  1800,  under 
a  charter  authorizing  a  capital  of  45,000,000  francs,  say 
,£1,800,000,  which  was  soon  subscribed  and  fully  paid. 
In  1806  the  bank  received  a  new  charter,  and  under- 
went a  more  complete  organization,  and  its  capital  was 
increased  to  90,000,000  francs ;  but  this  was  subse- 
quently reduced  to  67,000,000  by  the  bank's  own  act  in 
buying  in  and  cancelling  the  excess  of  shares  beyond 
this  sum.  It  stood  at  this  until  the  year  1857,  when  the 
amount  of  its  capital  was  again  raised  to  the  sum  of 
182,000,000  francs,  or  say  ,£7,300,000,  at  which  it  now 
stands. 

4.  Like  the  Bank  of  England,  the  French  National 
Bank  has  passed  through  many  severe  trials,  but  has  very 
generally  been  prudently  and  ably  managed,  and  has 
yielded  much  larger  profits  to  its  proprietors  than  the 
Bank  of  England.  Its  success  in  this  respect  may,  to 
some  extent,  be  due  to  its  having  always  possessed  a 
monopoly  in  the  supply  of  paper  money;  and  its  divi- 
dends have  not  unfrequently  been  at  the  yearly  rate  of 
from  150  to  250  francs  on  the  1,000  franc  share,  or  from 
15  to  25  per  cent. 

5 .  I  have  alluded  in  a  former  chapter  to  the  marvellous 
manner  in  which  the  French  Government,  through  the 
intervention  of  this  powerful  and  generally  well-managed 
institution,  paid  off  the  German  indemnity,  and  showed 
that  very  little  actual  money  or  bullion  was  used  to  pay 
it.  It  may  here  be  remarked  that  about  nine-tenths  of 
the  5,000,000,000  francs  (^200,000,000)  were  paid  by 
the  transferrence  of  "purchasing  power  "  raised  on  the 
national  credit.  The  Germans,  being  possessed  of  this 
power,  could  use  it  to  buy  gold,  or  any  thing  else  they 


204  CURRENCY. 

needed ;  and  as  gold  is  only  useful  for  what  it  will  ex- 
change for  or  buy,  but  little  of  the  sum  total,  probably, 
was  ever  invested  in  that  commodity.  Now,  what  the 
Bank  of  France  did  to  aid  in  this  prodigious  financial 
operation,  was  to  lend  the  Government  out  of  its  own 
trading  resources  in  1870,  1,363,000,000  francs,  nearly 
^54,000,000  sterling.  To  do  this,  it  was  authorized  to 
suspend  specie  payments,  though  I  very  much  doubt 
whether  it  was,  in  point  of  fact,  necessary ;  still,  as  a 
prudential  measure,  it  was  perhaps  the  best  thing  to  do. 
It  is  sufficient  to  know  that  the  result  was,  the  success- 
ful raising,  through  great  loan  agencies  all  over  Europe, 
of  the  entire  loan  of  ^£2  00,000,000,  and  the  repayment, 
within  five  years,  of  the  whole  sum  advanced  towards  it 
by  the  Bank  of  France. 

6.  As  an  aid  to  these  great  financial  operations,  the 
National  Assembly  in  1872  passed  "a  stay  law,"  which 
enabled  acceptors  of  bills  held  by  the  bank  to  suspend 
payment  for  a  year ;  and  it  has  been  stated  authoritatively, 
that  this  measure  was  most  salutary  in  its  effects,  and  that 
scarcely  any  loss  was  sustained  by  the  bank  in  conse- 
quence. The  same  thing  was  done  in  several  of  the 
Southern  States  at  the  close  of  the  American  war.  If  the 
British  Government  finds  it  wise,  for  the  sake  of  securing 
a  "  breathing-time  "  for  the  Bank  of  England,  to  suspend 
the  Bank  Act  in  periods  of  crises,  may  it  not  be  wise  to 
extend  the  suspension  to  all  traders  for  one  or  two  months, 
till  the  fury  of  the  financial  cyclone  has  had  time  to  subside  ? 
"  What's  sauce  for  the  goose  is  sauce  for  the  gander." 

7.  I  have  directed  attention  to  the  issue  and  manage- 
ment by  the  Bank  of  France  of  paper  money  as  being 
more  theoretically  and  practically  perfect  than  that  of  the 
Bank  of  England,  or  any  other  issuer  of  such  money. 
The  obvious  reason  for  this  nearer  approach  towards  a 
perfect  system  seems  to  be,  that  the  bank  does  not  issue 


CURRENCY   AND    BANKING   IN    FRANCE.  205 

notes  on  public  securities,  and  always  keeps  on  hand  an 
adequate  supply  of  cash  money  to  meet  all  its  obliga- 
tions. It  does  not  treat  its  own  notes  as  good  reserve, 
and  discounts  commercial  paper  freely ;  whilst  the  Bank 
of  England  deals  much  more  largely  in  long  securities, 
liable  to  material  fluctuations  in  market  value  in  times 
of  great  depression  or  unsound  speculation  and  general 
inflation  of  values,  and  overtrading  and  "production." 

S.  But,  after  all,  much  of  the  success  of  the  French 
Bank  is  unquestionably  due  to  the  circumstance  that  it 
has  a  monopoly  of  the  issue  of  paper  money,  and  is  free 
from  the  effects  of  sharp  competition,  which  exists  when- 
ever there  are  a  large  number  of  licensed  issuers  in  a 
country,  whose  chief  aim  is  to  make  a  profit  out  of  the 
business.  Hence,  for  these  and  other  reasons  of  a  pru- 
dential nature,  the  Bank  of  France  affords  the  best  ex- 
ample, on  a  large  scale,  of  a  sound  and  scientifically 
conducted  system  of  paper  money  on  record,  unless  it 
be  that  of  the  State  Issue  Department  for  India,  which 
is  a  pure  and  simple  issuer  of  convertible  paper  money. 

9.  In  making  these  comparisons,  I  ought  not  to  omit 
the  Treasury  Issue  Department  at  Washington.  Under 
the  able  and  honest  administration  of  Gen.  F.  E.  Spin- 
ner, a  very  perfect  routine  business  became  early  estab- 
lished ;  and  no  possible  fault  can  be  found  with  the  busi- 
ness machinery  for  issuing  and  renewing  notes.  The 
fault  is  in  the  inception  of  the  plan  of  issuing  demand- 
notes  not  redeemable  in  coin,  and  in  over-supply,  in  total 
disregard  or  ignorance  of  the  fundamental  principles  of 
money  or  currency.  No  national  issue  department  can 
be  safe  in  the  United  States,  that  does  not  provide  effectu- 
ally against  the  temptation  of  a  finance  minister  to  use  the 
issue  for  financial  instead  of  for  purely  monetary  ends  ; 
and  it  must  be  kept  out  of  party  politics  as  effectually  as 
the   national   banks   of  France   and   England.      In  the 


206  CURRENCY. 

United  States,  the  party  machinery  seems  to  have  become 
a  part  of  the  State  itself.  Party  organizations  are  perma- 
nent fixtures  on  the  body  politic  ;  and  the  dominant  party 
is  always  unscrupulous  as  to  what  it  lays  its  hands  on  to 
maintain  itself  in  power,  and  is  not  over  nice  about  the 
provisions  of  the  Constitution  when  a  crisis  in  its  affairs 
arises.  Hence  greater  safeguards  are  there  needed  than 
in  most  other  countries. 

10.  At  this  time,  in  France,  the  only  really  important 
question  seems  to  be,  whether  the  body  of  shareholders 
composing  the  Bank  of  France  shall  have  the  profits  of 
the  issue,  or  the  nation.  If  the  capital  or  the  circulation 
of  the  bank  were  taxed  in  some  ratio  correspondent  with 
the  profits  derived  from  the  note  issue,  perhaps  a  change 
in  favor  of  the  State  might  not  be  expedient.  The  prin- 
ciple of  "  farming  out  "  the  issue  of  paper  money  to  private 
parties  is  not  sound,  and,  unless  very  good  reasons  can  be 
shown  for  it,  ought  not  to  exist.  The  most  eminent  of 
French  economists,  M.  M.  Chevalier,  is  a  stanch  advo- 
cate in  favor  of  a  State  issue,  or  of  selling  the  notes  for 
their  full  market  value  {vide  his  letter  in  Appendix). 
His  views  and  arguments  have  been  frequently  set  forth 
in  the  columns  of  the  leading  journal  of  Paris,  the  "  Jour- 
nal des  Debars ;  "  and  he  claims,  as  I  do,  that  the  State 
can  no  more  properly  delegate  its  prerogative,  to  bodies 
of  incorporated  capitalists  to  issue  paper  money,  than  it 
can  the  right  to  coin  metallic  money,  or  to  regulate  the 
weights  and  measures  of  the  nation. 

ii.  There  is  one  defect  in  the  currency  issue  of  France, 
that  I  cannot  pass  by  without  notice.  It  is  the  want  of 
notes  of  lower  denominations  than  one  hundred  francs. 
There  should  be  issued  all  the  twenty  and  forty  or  fifty 
franc  notes  the  public  may  be  willing  to  buy.  It  is  espe- 
cially inconvenient,  in  travelling  in  France  and  in  other 
continental  countries,  to  be  compelled  to  carry  sums  of 


EFFECT   OF  THE   VOLUME   OF   CURRENCY.  207 

metallic  money,  and  especially  silver  change.  In  a  pretty 
extended  tour  I  made,  some  years  ago,  through  France, 
Belgium,  Germany,  Switzerland,  and  the  Austrian  Tyrol, 
I  found  the  Bank  of  France  note  as  good  as  gold,  but 
often  experienced  difficulty,  especially  in  "posting,"  to 
get  a  hundred  franc  note  changed.  If  the  world  comes 
to  regard  paper  money  in  the  light  of  a  more  con- 
venient tool  of  industry  than  metallic  money,  the  preju- 
dice against  smaller  denominations  will  yield  to  practical 
utility  and  the  wants  of  the  people,  and  lead  to  the  issue 
of  notes  to  represent  the  gold  coin  commonly  used  in  all 
countries,  and  an  immense  saving  of  capital  now  invested 
in  such  coin. 


CHAPTER   XXIV. 


HOW  THE  VOLUME  OF  CURRENCY  AND  OTHER  THINGS   AFFECT 

THE    MARKET    OR    EXCHANGE    VALUE    OF    COMMODITIES. 

PRESENT  INFLATED  CONDITION  OF  THE  CURRENCY  AND 
BANK  DISCOUNTS  IN  THE  UNITED  STATES  (MARCH,  1879), 
AND  WHAT  IT  PORTENDS.  NICHOLAS  RIDDLE  ON  CUR- 
RENCY. 

i.  This  subject  has  been  treated  generally  in  Chaps. 
IV.  and  V. ;  but,  in  consequence  of  the  attempt  recently 
made  by  some  American  economists  in  the  "  New  York 
Commercial  Bulletin,"  a  journal  circulating  in  mercantile 
circles,  to  controvert  the  doctrine  that  the  prices  of  arti- 
cles are  influenced  by  the  volume  of  currency,  I  propose 
a  further  examination  of  the  subject.  If  the  doctrine 
attempted  to  be  set  up  by  these  writers  is  correct,  then 
postulates  3  and  4  are  incorrect,  and  not  self-evident 
propositions,  as  I  affirm  them  to  be.  No.  3  says,  "  Money 
is  a  commodity,  and  has  a  market  value  independent  of 


208  CURRENCY. 

the  material  of  which  it  is  made  ;  and,  like  such  material, 
its  market  value  is  governed  by  its  volume,  or  supply  and 
demand."  No.  4:  "The  value  of  money  or  any  other 
commodity  is  in  the  inverse  ratio  of  its  volume."  These 
propositions  embrace  most  important  fundamental  princi- 
ples, underlying  the  whole  edifice  of  economic  science. 
Hence  I  propose  to  leave  no  grounds  for  denying  their 
correctness. 

2.  In  respect  to  currency,  the  postulates  simply  mean, 
that  when  currency,  usually  composed  of  coin  and  paper 
money,  is  increased  in  amount,  its  trading  power,  or 
exchange  value,  is  correspondingly  diminished  in  the  same 
manner  as  that  of  other  commodities ;  on  the  other  hand, 
if  the  volume  be  diminished,  its  trading  or  exchange 
value  will  be  increased,  pari  passu,  with  such  diminution 
or  contraction.  It  is  not  denied  that  this  law  is  absolute 
and  fundamental  as  to  other  leading  commodities,  such, 
for  instance,  as  iron,  corn,  wheat,  cotton,  and  indeed  the 
whole  category.  But  currency,  after  all,  is  the  most 
conspicuous  example,  because  with  it  we  measure  and 
differentiate  the  value  of  all  other  things  dealt  in,  in  the 
markets.  But  the  theorists  I  am  referring  to  contend  that 
currency  is  an  exception  to  the  rule,  and  that  there  is 
never  too  much  or  too  little  of  it.  But  that  assumption 
is  not  to  the  point.  The  question  of  "  too  much  or  too 
little  "  has  no  bearing  on  the  proposition  itself. 

3.  The  theory  is  simply  founded  on  a  misconception 
of  the  services  rendered  by  currency,  and  in  opposition 
to  an  equally  glaring  fallacy  that  the  market  value  of 
any  given  commodity  is  determined  without  reference 
to  other  factors  in  the  great  sum  of  human  industries. 
In  treating  this  question,  I  am  considering  currency  in 
the  light  of  coined  money,  and  paper  convertible  into 
coin  at  the  option  of  the  holder.  Such  currency,  I  have 
shown,  is  very  often  inflated  where  the  limit  of  the  issue 


EFFECT  OF  THE  VOLUME  OF  CURRENCY.      209 

is  allowed  to  run  far  beyond  the  amount  of  metal  kept 
as  reserve  for  its  conversion  ;  but  it  is,  nevertheless,  less 
liable  to  affect  other  values,  as  measured  by  itself,  than 
inconvertible  paper.  In  other  words,  its  effects  are  not 
so  immediately  visible  as  those  of  the  latter.  Hence 
some  have  concluded,  without  reasoning,  that  the  vol- 
ume of  metallic  and  convertible  paper  together  does  not 
influence  values  at  all.  The  question  to  determine  is, 
whether  the  prices  of  goods  have  risen,  or  the  price  of 
currency  has  fallen,  —  for  it  is  a  question  of  relative 
values,  —  when  the  one  falls,  the  other  appears  to  have 
risen. 

4.  The  question  is  complicated  by  other  circumstances 
and  things.  It  would  be  erroneous  to  affirm,  that,  if  the 
volume  of  currency  were  doubled  in  a  short  time,  the 
market  value  of  goods,  as  measured  by  it,  would  in  like 
manner  be  doubled,  for  the  simple  reason  that  currency 
is  but  one,  and  by  no  means  the  largest  one,  in  the  great 
volume  of  things  which  act  on  and  affect  market  values. 
In  postulates  35  and  36  I  very  clearly  presented  the  ele- 
ments which  enter  into  this  question  in  modern  indus- 
trial communities,  and  really  determine  the  relations  of 
value  among  the  whole  category  of  commodities.  In  35 
I  showed,  that,  by  the  agency  of  banks  of  discount,  the 
market  value  of  goods  in  course  of  production  and  dis- 
tribution was  turned  into  trading  power  without  the  aid 
of  currency,  and  constituted  the  larger  proportion  of  the 
loans  discounted  to  traders,  manufacturers,  and  specu- 
lators. In  postulate  36  I  stated  what  composed  the 
balance  of  such  loans,  including  money,  or  currency. 
Now,  currency  only  forms  about  five  per  cent  of  the 
gross  amount  of  trading  power  in  a  commercial  country 
like  the  United  States ;  and  it  is  in  its  capacity  or  office 
of  trading  power  that  it  plays  its  part  in  the,  genera/ 
category  of  things  which  stand  for  capital.     But,  though 


2IO  CURRENCY. 

metallic  money  is  one  of  the  smallest  factors  in  the  sum, 
it  is  the  most  important,  because  of  its  greater  stability 
under  the  operations  of  supply  and  demand.  Currency 
may  be  likened,  in  this  respect,  to  "  a  little  leaven  which 
leaveneth  the  whole  lump."  When  its  stimulating  effect 
is  set  in  motion  by  unusual  issues  of  bank  or  government 
notes,  without  regard  to  the  quantity  of  metallic  money 
behind  them,  it  suddenly  causes  a  rise  in  the  market 
value  of  other  and  grosser  things,  as  the  leaven  causes 
the  mass  of  dough  to  rise. 

5.  The  question  as  to  whether  gold  has  risen  or  goods 
have  fallen,  or  vice  versa,  is  one  of  easy  solution.  If 
there  occurs  a  period  when  there  is  a  general  rise  along 
the  whole  line  of  leading  commodities,  —  such,  for  in- 
stance, as  cotton,  corn,  wheat,  iron,  etc.,  —  it  is  evidence 
that  trading  power,  including  currency,  is  abundant  and 
cheap.  When  one,  or  two,  or  three  articles  have  risen, 
and  the  general  category  of  goods  remains  unchanged, 
it  is  a  sign  that  trading  power,  or  capital,  maintains  its 
equilibrium,  or  that  supply  and  demand  balance  each 
other,  and  the  change  in  the  exceptional  articles  will  be 
found  to  be  due  to  other  causes,  such  as  over  or  short 
production  of  the  particular  ones. 

6.  When  it  is  seen  that  metallic  money  alone  is  not 
chargeable  with  fluctuations  in  the  market  value  of  com- 
modities, but  forms  only  a  small  part  of  the  things  respon- 
sible for  them,  it  will  also  be  seen  how  important  it  is  to 
hold  our  currency  as  close  as  possible  to  one  of  pure 
metal,  using  paper  as  a  substitute  for  it,  for  convenience. 
Metallic  money  never  fluctuates  violently  or  suddenly, 
and,  unlike  inconvertible  paper,  and  discounts  and  re- 
discounts of  goods,  or  goods  discounted  several  times 
over  through  resales,  does  not  tend  to  inflation  and  over- 
trading and  production.  Many  good  reasoners  have  in- 
dulged and   speculated  much  on  the  effect  on  market 


EFFECT  OF  THE  VOLUME  OF  CURRENCY.      211 

values  produced  by  the  great  discoveries  of  the  precious 
metals  in  the  United  States  and  Australia  during  the  last 
thirty  years,  and  founded  thereon  predictions  of  a  large 
increase  in  such  values  in  respect  to  labor  and  the  entire 
category  of  the  products  of  labor.  These  predictions 
have  not  come  to  pass,  because,  contemporaneously  with 
the  increased  production  of  these  metals,  a  still  greater 
increase  has  taken  place  in  the  production  and  con- 
sumption of  nearly  every  thing  else.  This  latter  result 
has  been  brought  about  by  the  important  improvements 
and  facilities  in  communication,  and  the  distribution  of 
commodities  of  the  most  bulky  descriptions,  and  cheaper 
and  more  improved  methods  of  production  and  manu- 
facture. Consumption  has  likewise  kept  pace  with  pro- 
duction, in  consequence  of  the  general  expansion  and 
distribution  of  wealth. 

7.  A  due  regard  to  these  considerations  leads  irresist- 
ibly to  the  logical  conclusion  that  the  ratio  of  values 
between  the  precious  metals  and  of  the  general  category 
of  commodities  has  been  wonderfully  maintained.  Silver 
has  fallen  most,  owing  to  very  large  amounts  being  sud- 
denly precipitated  on  the  markets  of  the  world  by  the 
Germans,  who  have  wisely  adopted  the  sound  policy  of 
not  forcing  on  the  people  a  currency  so  clumsy,  and  so 
liable  to  sharp  fluctuations.  During  the  thirty  years  in 
question,  the  product  and  stock  of  gold  and  silver  have 
been  doubled  :  but  the  other  productions  of  labor  have 
been  trebled  by  railway  and  steamship  transit,  and  im- 
proved methods  of  production  and  manufacture  ;  and  with 
these  the  ability  to  consume  has  fully  kept  pace.  Thus 
the  equation  between  supply  and  demand  has  been,  as 
already  observed,  wonderfully  maintained. 

8.  It  would  appear  from  these  considerations,  that,  but 
for  the  contemporaneous  increase  in  the  production  of 
gold  and  silver  during  the  last  thirty  years,  their  market 


212  CURRENCY. 

value,  or  trading  power,  must  have  considerably  increased. 
But  had  their  quantity  remained  stationary,  being  only 
five  per  cent  of  the  capital  used  in  conducting  the  indus- 
tries of  the  world,  including  the  paper  money  used  with 
the  coin,  the  market  value  of  other  things  would  not  have 
fallen  in  the  same  ratio  as  that  in  the  respective  things 
we  are  comparing.  The  perturbations  in  the  market 
value  of  labor  and  commodities,  produced  by  the  action 
of  supply  and  demand,  are,  therefore,  brought  to  a  scien- 
tific or  logical  solution.  It  is  the  essence  of  absurdity  to 
claim  that  labor,  or  any  article  dealt  in,  in  the  markets, 
is  exempt  from  this  universal  law.  Bullion,  the  raw  mate- 
rial, and  money,  the  manufactured  article,  are  alike  subject 
to  it ;  and  the  plan  I  have  reasoned  out,  and  shall  more 
fully  state  in  the  next  two  or  three  chapters,  of  maintain- 
ing a  close  approximate  value  between  bullion  and  coin, 
is  the  only  true,  scientific,  and  practical  method  in  exist- 
ence, or  which  can  be  devised  for  the  supply  of  currency. 
I  make  this  broad  claim,  because  science  is  inexorable  in 
its  requirements.  It  has  not  two  ways  for  reaching  the 
same  result.  All  deviations  from  its  teachings  are  viola- 
tions of  natural  laws,  and  all  legislation  to  override  its 
precepts  is  erroneous  and  mischievous. 

9.  I  have,  in  many  places,  endeavored  to  disabuse  the 
minds  of  thinking  men  of  the  habit  of  treating  money 
and  capital  as  synonymous.  I  wish  now  to  inculcate  the 
equally  important  truth,  that  fully  three-fourths  of  the 
capital  used  in  conducting  the  industries  of  the  chief 
commercial  and  manufacturing  countries  consist  of  the 
market  value  of  goods  in  course  of  production  and  distri- 
bution. This  capital  is  made  available  by  banks  of  dis- 
count and  deposit,  by  means  of  bills  representing  goods, 
and  checks  used  for  transference.  This  easy  process  of 
turning  goods,  before  they  are  ready  for  market  or  have 
reached  consumers,  into  capital,  tends  mightily  to  stimu- 


EFFECT   OF  THE   VOLUME   OF   CURRENCY.  213 

late  production,  and,  to  the  same  extent,  to  increase  the 
general  volume  of  trading  power ;  and,  unless  consump- 
tion keeps  pace  with  production,  the  increased  quantity  of 
goods  tends  directly  to  diminish  market  values,  including 
that  of  labor.  If  it  is  the  general  volume  of  capital,  acting 
on  labor  and  goods,  that  influences  their  market  values, 
it  follows,  as  a  logical  sequence,  that  any  extraordinary 
addition  (by  production)  in  one  or  two  articles,  —  such, 
for  instance,  as  gold  and  silver,  —  only  tends  to  increase 
that  volume  in  the  same  ratio  that  these  articles  bear  to 
the  whole.  The  same  rule  applies  to  other  productions, 
such  as  cotton,  corn,  wheat,  or  iron.  In  this  respect  the 
most  perishable  articles  having  market  value  add  just  as 
much  to  trading  power  as  the  "  everlasting  metals  "  of  M. 
Cemuschi.  These  principles  will  serve  to  illustrate  the 
perpetual  changes  that  are  taking  place  in  the  market 
values  of  commodities. 

10.  I  will  now  further  consider  the  part  played  by 
paper  money  not  fully  covered  by  coin.  It  has  already 
been  demonstrably  shown,  that  mere  convertibility  of 
paper  for  "  occasional  calls  "  in  "  flush  times  "  is  no  guar- 
anty against  over-issues  of  such  money  by  banks  and 
governments.  The  security  given  by  banks  against  loss 
by  the  abuse  of  the  privilege  does  not  prevent  the  recur- 
rence of  periodical  break-downs,  and  long  derangements 
to  the  industries.  At  this  time  (March,  1879)  gold  and 
silver  coin  in  the  United  States  are  at  par  with  each  other, 
and  with  paper  money.  The  coin  amounts  to  about 
$350,000,000,  in  the  hands  of  the  Government,  the  banks, 
and  the  people.  Some  estimate  the  total  higher,  but  I 
prefer  to  take  the  lowest  figures  set.  The  entire  paper  is 
in  excess  of  $660,000,000 ;  and  all  must  be  treated  as  in 
actual  circulation  for  financial  purposes.  To  reach  a  clear 
estimate  of  the  forces  that  act  on  the  industries  of  the 
country,  we  must  get  at  and  add  to  these  figures  the  dis- 


214  CURRENCY. 

counts  of  banks.  On  Oct.  i,  1878,  the  national  banks 
had  under  discount  $830,000,000  of  bills.  We  have  no 
means  of  knowing  accurately  the  amount  of  discounts  of 
state  and  savings  banks  and  private  bankers,  and  must, 
therefore,  make  the  best  estimate  in  our  power.  For 
this  purpose,  we  will  take  the  deposits  of  the  national 
banks  at  the  above  date.  These  were  in  round  numbers, 
$665,000,000,  showing  the  discounts  to  have  been  about 
twenty-five  per  cent  more  than  the  deposits.  The  total 
deposits  of  state,  private,  and  savings  banks,  having  capi- 
tal, and  discounting  more  or  less  commercial  paper,  were 
$1,242,000,000.  To  be  safe,  we  will  assume  that  the  dis- 
counts of  these  banks  and  bankers  amounted  to  only 
twenty  per  cent  above  their  deposits.  It  would  then  ap- 
pear, if  there  has  been  no  change  since  last  October,  that 
there  are  in  operation  the  following  forces  acting  on  the 
industries  of  the  United  States  :  — 

1.  Gold  and  silver  coin     ....  $350,000,000 

2.  Government  notes  issued  to  the  public,  347,000,000 

3.  National  currency  loaned  to  banks      .  323,000,000 

4.  National  banks'  discounts    .         .         .  830,000,000 

5.  Discounts  of  other  banks,  say     .         .  1,450,000,000 

$3,300,000,000 

Three  thousand  three  hundred  millions  of  dollars, — 
about  threefold  the  amount  of  similar  forces  in  operation 
in  i860,  or  twenty  years  ago.  There  are,  besides,  de- 
posits of  $800,000,000  in  savings  banks  having  no  capi- 
tal, but  which  discount  more  or  less  commercial  paper 
on  the  sly  with  public  or  state  securities  as  collateral. 
The  figures  representing  deposits  and  discounts  are  taken 
from  the  valuable  and  carefully  compiled  report  of  Comp- 
troller Knox  for  1878. 

11.  When  it  is  considered  that  the  circulation  and 
deposits  alone  of  the  national  banks,  amounting  to 
$1,150,000,000,  are  immediate  liabilities  against  $150,- 


EFFECT  OF  THE  VOLUME  OF  CURRENCY.      215 

000,000  of  cash  assets,  the  remaining  assets  being  bills 
under  discount  and  government  securities,  it  will  be  seen 
on  what  a  magazine  of  combustible  material  our  indus- 
tries are  founded.  Private  bankers  and  state  and  savings 
banks,  though  they  issue  no  paper  currency,  are  in  no 
better  position.  People  are  everywhere  contemplating 
with  satisfaction  the  commencement  of  a  new  era  of 
prosperity.  The  wages  of  labor  are  beginning  to  stiffen 
up.  "  Tramps  "  are  growing  fewer  in  number.  The  prices 
of  most  domestic  articles  are  increasing.  Goods  are  in 
demand,  and  bills  in  a  year  or  two  will  greatly  multiply ; 
and  banks,  to  use  the  phrase  of  an  English  economist, 
will  "discount  mightily."  As  trading  capital  is  thus  in- 
creased and  cheapened,  goods  and  labor  will  rise  pari 
passu  therewith.  New  national  banks  will  be  started, 
and  old  ones  will  increase  their  circulation.  Gold  and 
silver  are  added  at  the  rate  of  $150,000,000  a  year. 
Foreign  trade  is  largely  in  favor  of  this  country.  Every 
thing  portends  an  early  and  rapid  expansion  and  inflation 
of  business  and  over-production,  and  the  approach  of 
"the  fool's  paradise."  The  country  will  soon  be  in  the 
position  of  the  rich  man  in  the  Bible,  whose  barns  and 
garners  were  well  filled ;  but  there  was  the  law  of  nature, 
which,  like  a  spectre,  said,  "Thou  fool,"  etc. 

12.  There  is  nothing  to  compare,  in  importance,  to 
which  the  national  Legislature  of  the  United  States  can 
turn  its  attention,  with  that  of  establishing  a  sound  sys- 
tem of  currency ;  and,  to  be  sound,  it  must  be  wholly 
detached  from  government  and  banking  finance.  My 
last  postulate  is  fundamental,  and  a  great  truth. 

"There  is  a  most  obvious  distinction  between  cur- 
rency and  finance  :  the  one  is  a  tool  of  industry,  and 
the  other  a  method  of  conducting  the  business  opera- 
tions of  nations,  states,  corporations,  and  individuals." 
Hence    I   have  drawn   the  logical  corollary  that  paper 


2l6  CURRENCY. 

money  should  never  be  permitted  to  be  issued  for  the 
creation  of  resources,  or  for  financial  purposes,  but  only 
to  take  the  place,  because  of  its  convenience  in  hand- 
ling and  circulating,  of  metallic  money.  7/  must  be  con- 
fined to  serving  as  a  substitute  for  the  money  by  which 
all  civilized  nations  estimate  and  differentiate  the  value 
of  labor  and  all  its  products,  and  all  things  having  mar- 
ket value.  If  this  can  be  done,  we  shall  strip  industrial 
crises  of  nearly  all  their  power  to  injure  the  great  mass 
of  the  industrial  part  of  society.  The  evils  of  these  peri- 
odical cyclones  will  be  confined  chiefly  to  those  specu- 
lative, ever  greedy  members  of  the  community  who  have 
been  most  instrumental  in  raising  the  whirlwind.  The 
tools  of  the  workmen  will  remain  as  sound  and  bright, 
and  as  efficient,  as  ever.  The  mixing  up,  in  thought  by 
many  eminent  economists,  and  in  practice  by  those  who 
follow  the  bad -teaching  of  great  men,  of  the  two  things, 
currency  and  finance,  is  at  the  bottom  of  the  evils  in 
question.  The  issue  of  paper  money  is  not  banking,  and 
hence  banks  ought  not  to  issue  it.  But  it  is  banking 
for  the  Government  to  issue  "  national  currency "  and 
lend  it  to  the  banks  at  one  per  cent  tax  on  circulation, 
and  hence  should  not  be  continued.  The  Government 
might  with  equal  propriety  enter  into  any  other  financial 
or  business  undertaking  with  private  parties. 

13.  The  late  Nicholas  Biddle,  president  of  the  old 
United  States  Bank,  which  was  a  partnership  concern 
between  the  Government  and  a  body  of  private  capital- 
ists, said  many  things  so  pertinent  to  the  points  I  am 
illustrating,  that  I  cannot  forbear  to  quote  some  of  them. 
In  a  circular  which  he  issued  to  the  shareholders  of  that 
institution,  in  May,  1829,  he  used  the  following  striking 
language  :  "  Banks  are  often  managed  by  sanguine  per- 
sons, anxious  only  to  increase  the  profits  without  much 
personal  interest  or  pecuniary  responsibility  in  the  admin- 


EFFECT  OF  THE  VOLUME  OF  CURRENCY.      21  7 

istration.  The  constant  tendency  of  bankers  is  to  lend 
too  much,  and  put  too  many  notes  in  circulation.  Now, 
the  addition  of  many  notes,  even  while  they  are  as  good 
as  gold,  by  being  exchangeable  for  coin,  may  be  inju- 
rious, because  the  increase  of  the  mixed  mass  of  money 
generally  causes  a  rise  in  the  price  of  all  commodities." 
Mr.  Biddle's  remedy  for  such  evils,  when  they  have  be- 
come dangerous  to  the  stability  of  the  banks,  is  equally 
striking,  and  is  demonstrative  of  the  folly  of  allowing 
banks  to  issue  paper  currency  at  all,  no  matter  how  much 
security  is  given  to  guard  against  loss  on  circulation.  It 
is  against  the  principle  as  well  as  the  practice  of  the 
thing  that  I  am  arguing ;  and  security  may  mitigate,  but 
cannot  guard  against,  the  evil  effects.  Such  evils,  and 
the  banker's  remedy,  are,  it  will  be  seen  by  Mr.  Biddle's 
prescription,  at  the  very  bottom  of  the  causes  which  lead 
to  industrial  crises.  "  When  the  banks  of  a  country," 
says  this  astute  and  able  banker,  "  perceive  such  a  de- 
mand for  coin  for  exportation  as  diminishes  their  stock 
on  hand,  they  should  stop  the  exportation ;  ...  by 
issuing  no  new  notes,  and  declining  to  renew  the  notes 
of  your  debtors,  you  compel  them  to  return  to  you  the 
bank  notes  you  have  lent  them,  or  their  equivalents. 
This  makes  the  bank  notes  scarce,  —  this  makes  them 
more  valuable,  —  the  debtor,  in  his  anxiety  to  get  notes, 
being  willing  to  sell  his  goods  at  a  sacrifice  :  this  brings 
down  the  prices  of  goods,  and  makes  every  thing  cheaper," 
and,  I  will  add,  brings  on  the  panic  and  crisis  which  were 
before  impending.  And  such  is  still,  and  ever  will  be, 
the  remedy  for  the  evils  brought  on  society  by  banks  of 
issue  and  discount ;  and  this  is  the  pernicious  system 
which  a  part  of  the  press  of  this  country  labors  inces- 
santly to  perpetuate.  A  writer  of  an  able  article  on  the 
subject  of  currency,  which  appeared  some  time  since  in 
one  of  these  journals  in  this  city,  to  whom  I  am  indebted 


2l8  CURRENCY. 

for  Mr.  Biddle's  views,  very  well  observes,  "They  first 
inflate  the  currency  by  increasing  its  volume,  in  order  to 
increase  their  own  profits  ;  and  then  contract  it  again, 
to  prevent  their  own  bankruptcy,  without  the  slightest 
regard  for  the  rights  or  interests  of  the  community.  Not- 
withstanding these  confessed  evils  resulting  from  banks 
of  issue,  the  journal  in  question  and  its  allies  persist  in 
advocating  the  continuance  of  the  causes  of  our  greatest 
industrial  evil,  when  a  most  favorable  opportunity  pre- 
sents itself  to  get  rid  of  them  by  abolishing  the  power 
of  banks  to  emit  paper  money  altogether.  The  Consti- 
tution of  the  United  States  makes  no  provision,  express 
or  implied,  for  issuing  and  loaning  to  national  banks 
"  national  currency,"  or  for  granting  charters  to  such 
institutions.  If  the  currency  in  question  were  sold  to 
banks  for  its  full  face  value  in  gold,  there  could  possibly 
be  no  abuse  of  the  practice,  if  the  Government  held  all 
the  gold  paid  for  them  to  secure  their  redemption  and 
prevent  inflation.  But  to  lend  such  currency  to  two 
thousand  banks,  chartered  expressly  to  be  so  favored,  is 
a  violation  alike  of  the  organic  and  the  natural  laws. 

14.  It  will  be  seen,  in  the  next  two  or  three  chapters, 
how  the  needful  amount  of  metallic  and  paper  currency 
may  be  maintained  by  a  strictly  automatic  process,  without 
any  cost  to  the  nation  as  such.  At  the  time  of  writing 
this  chapter,  the  nation  holds  about  $150,000,000  of  metal- 
lic money,  purchased  to  maintain  specie  payments  on 
$346,000,000  of  greenbacks,  or  United  States  notes, 
issued  directly  to  the  people.  If  the  legal-tender  char- 
acter of  these  notes  were  abolished,  and  no  more  were 
sold  than  the  people  were  willing  to  pay  for  in  gold  bul- 
lion and  coin,  and  the  bank  notes  were  retired,  we  should 
approximate  a  more  correct  monetary  system.  See  Chap. 
XXXI.  for  a  formulated  Act  of  Congress. 

15.  I  add  this  paragraph  in  December,  1879,  to  state 


EFFECT   OF   THE   VOLUME   OF   CURRENCY.  219 

that  my  foreshadowing  of  the  tendency  to  inflation  in 
values  has  thus  far  been  more  than  verified.  In  Septem- 
ber of  1878,  I  placed  before  a  committee  of  Congress  a 
communication  containing  substantially  the  same  facts 
and  arguments  respecting  banks  of  issue  and  discount, 
and  affirming  that  the  then  existing  depression  in  busi- 
ness, to  investigate  the  causes  of  which  and  recommend 
remedial  measures  the  committee  had  been  appointed, 
had  already  ceased,  and  a  period  of  inflation  had  set 
in,  in  its  incipient  beginnings.  Since  then  the  prices 
of  nearly  all  commodities  and  the  wages  of  labor  have 
simultaneously  and  considerably  risen.  Speculation  is 
rife  in  most  leading  articles  usually  made  the  subject 
of  speculation.  There  has  been  an  aggregate  rise  in 
the  market  value  of  stocks  of  fully  $  150,000,000,  with 
scarcely  any  increase  in  actual  or  intrinsic  value.  Cot- 
ton, wheat,  iron,  corn,  nearly  all  raw  and  manufactured 
articles,  have  risen  in  a  single  year  from  twenty  to  fifty 
per  cent.  There  has  been  added  to  the  volume  of  cur- 
rency about  $150,000,000  of  coined  money,  and  the  bal- 
loon bids  fair  to  go  on  expanding  till  another  explosion 
occurs.  The  national  banks  have  only  increased  their 
reserve  a  trifle,  and  turn  their  loans  of  "national  cur- 
rency" to  the  best  account  for  the  profit  of  their  share- 
holders. As  they  hold  but  some  $40,000,000  of  metallic 
money,  they  rely  on  that,  and  their  ability  to  draw  on  the 
Government  reserve  of  $155,000,000,  to  maintain  specie  ,J 
payments  and  meet  their  depositors'  calls  on  them.  All 
the  other  banks,  and  all  business  men  likewise,  have  an 
eye  on  that  $155,000,000.  The  importations  of  gold  and 
silver,  and  the  production  of  the  mines,  are  still  at  the 
rate  of  $150,000,000  a  year;  but  these  only  add  stimu- 
lus to  speculation  and  inflation.  A  bad  harvest,  or  some 
great  failure,  is  only  wanting  to  bring  about  a  repetition 
of  the  events  of  1837,  1847,  1857,  and  1873,  the  last  date 


2  20  CURRENCY. 

having  been  postponed  by  the  war,  and  the  borrowing 
by  the  nation,  States,  and  railway  companies,  in  foreign 
markets,  of  $2,500,000,000  of  capital,  which  was  expended 
in  the  United  States.  By  the  circumstance  of  the  immense 
crops  of  corn,  cotton,  wheat,  and  nearly  every  thing  else, 
for  four  successive  years,  and  the  failure  of  crops  for  two 
years  in  Europe,  the  balance  of  trade  has  been  turned 
strongly  in  favor  of  this  country,  and  a  most  favorable 
time  exists  for  establishing  a  sound  currency.  Will  it  be 
done  ?     I  fear  not. 


CHAPTER   XXV. 

GENERAL     SUMMARY     OF     THE     ARGUMENT.  THE     MONEY 

PROBLEM     TO    BE     SOLVED     BY    A    UNIVERSAL     MONETARY 

SYSTEM. PLAN    FOR   SUCH   A    SYSTEM    SUGGESTED,    GREAT 

BRITAIN     AND     AMERICA     TO     COMBINE     WITH     THE     LATIN 
NATIONS   AS   THE    INITIATION   OF   THE    SYSTEM. 

i.  The  reader  who  has  followed  my  reasoning,  and 
carefully  considered  my  postulates,  will  probably  agree 
with  me  that  the  money  question  must  be  taken  out  of 
the  region  of  dogmatic  and  empirical  teaching.  States- 
men must  treat  it  strictly  as  a  science,  and  the  issue  of 
coin  and  paper  money  must  be  confined  to  scientific 
methods.  In  Great  Britain  and  the  Latin-union  coun- 
tries the  coin  issue  approximates  that  position,  but  is  still 
imperfect,  as  will  be  seen  by  comparison  with  the  more 
perfect  system  I  am  advocating. 

2.  In  respect  to  the  issue  of  paper  money,  there  is  but 
a  slight  approximation  towards  a  strictly  scientific  method 
in  any  country.  The  consideration  of  the  question,  as 
well  as  the  methods,  is  still  under  the  control  of  those  who 
seek  to  make  a  profit  out  of  paper  money,  either  for  the 


GENERAL  SUMMARY  OF  THE  ARGUMENT.       221 

Slate  or  for  classes,  notwithstanding  that  the  results  of 
nearly  two  centuries  of  experience  condemn  the  practice. 
Instead  of  treating  paper  money  simply  as  a  more  con- 
venient tool  of  industry  than  metallic  money,  it  has  been, 
and  still  is,  wholly  subordinated  to  financial  considerations 
and  private  or  public  profit. 

3.  When  this  proposition  is  accepted  as  fundamental, 
as  it  certainly  is,  the  whole  theory  of  delegating  the  pre- 
rogative of  the  State  to  banks  or  individuals,  to  be  exer- 
cised in  the  issue  of  paper  money  to  trade  on,  and  for 
profit  and  gain  to  a  favored  class,  falls  to  the  ground. 
The  question  then  presents  itself,  Can  a  state  department, 
as  a  method  of  meeting  the  more  theoretically  perfect 
issue  and  management  of  paper  money,  be  organized? 
I  have  endeavored  to  show  in  Chap.  XVIII.  that  it  can, 
by  making  the  issue  of  coin  and  paper  both  automatic,  to 
be  entirely  governed  by  the  natural  laws  of  industry.  The 
issue  of  notes  wholly  on  metal,  on  the  original  plan  of  the 
banks  of  Amsterdam,  Venice,  Sweden,  and  Hamburg,  it 
has  been  pointed  out,  was  founded  on  this  theory,  which 
worked,  so  long  as  it  was  adhered  to,  with  precision,  and 
great  advantage  to  the  pubHc,  who  preferred  their  notes 
to  gold ;  and  that  the  evil  effects  of  a  deviation  from 
these  principles  by  the  Bank  of  England  was  the  begin- 
ning of  all  the  evils  of  paper  money. 

4.  I  have  pointed  out  that  the  suppression  of  all  banks 
of  issue  in  and  within  fifty  miles  of  London,  and  the  lim- 
itation set  on  the  issues  of  all  other  banks  in  the  United 
Kingdom,  were  steps  in  the  right  direction ;  though  the 
law  of  1849,  imposing  these  limitations,  failed  in  estab- 
lishing a  really  sound  monetary  system.  I  have  also 
shown,  that,  though  the  national  bank  system  of  the 
United  States  was  an  improvement  on  the  old  American 
system,  it  is  fatally  deficient  in  elements  of  science,  and, 
if  perpetuated,  must  control  the  Government,  and  prove 


22  2  CURRENCY. 

a  powerful  and  dangerous  despotism.  Furthermore,  I 
have  alluded  to  the  growth  and  development  of  a  party 
in  the  United  States  that  proposes  to  cut  loose  from  the 
stability  of  a  metallic  currency,  and  to  issue  paper  stamps 
for  the  whole  amount  of  the  national  debt,  which  they 
propose  to  pay  off  in  these  worthless  stamps  of  the 
nation. 

5.  On  the  other  hand,  I  have  kept  steadily  in  view  cer- 
tain great  fundamental  principles,  and  prominent  among 
them  the  distinction  between  money  and  trading  power, 
or  floating  capital,  and  the  evil  effects  on  the  minds 
of  the  people,  and  on  the  course  of  legislation  on  mone- 
tary and  financial  matters,  of  confounding  the  two  things, 
and  have  directed  attention  to  the  important  fact,  that 
only  a  certain  limited  amount  of  money  is  needed  to 
perform  the  special  services  for  which  it  was  invented, 
and  that  the  people  refuse  to  buy  more,  because  it  is 
a  costly  commodity,  and  only  useful  for  what  it  will  buy. 

6.  I  have  also  shown,  and  shall  presently  more  clearly 
demonstrate,  how  the  exact  amount  of  money  needed 
for  industrial  and  other  purposes  may  be  meted  out,  and 
automatically  supplied  through  state  issue  departments, 
and  how  the  same  may  be  made  universal,  without  dis- 
turbing the  present  circulation ;  or,  rather,  how  the  one 
system  may  be  substituted  for  the  other  without  any  in- 
dustrial disturbance.  I  would  here  observe,  that,  having 
a  clear  and  vivid  perception  of  these  important  funda- 
mental truths  and  principles,  I  have  been  greatly  pained 
to  witness  the  obstructions  to  the  introduction  of  im- 
proved and  readily  applied  methods  for  supplying  the 
metallic  and  paper  money  strenuously  opposed  and  re- 
sisted by  "the  practical  men"  and  the  banks  of  issue, 
who,  as  a  rule,  fancy  their  interests  will  be  impaired  by 
changes  indicated  by  science  as  desirable. 

7.  It  has  been  likewise  shown,  beyond   controversy, 


GENERAL   SUMMARY   OF   THE   ARGUMENT.  223 

that  the  issue  of  paper  money  forms  no  part  of  modern 
banking,  the  business  of  which  is  more  than  half  con- 
ducted by  non-issuing  banks,  and  that  the  entire  abo- 
lition of  the  word  "bank-note"  alone  will  eradicate  that 
delusion  from  the  public  mind.  Furthermore,  I  have 
incidentally  pointed  out  that  the  issuing  of  national  cur- 
rency to  banks  by  the  Government  on  public  securities 
held  by  the  Government,  and,  in  the  case  of  the  Bank 
of  England,  by  the  Issue  Department,  being  in  the  nature 
of  loans  from  the  nation  to  bankers,  was  and  is  banking, 
in  which  Governments  cannot  properly  engage. 

8.  Finally,  I  have  shown  how  readily  a  state  issue 
department  may  be  created  in  Great  Britain  and  America 
by  consolidating  the  respective  mints  in  each  country, 
with  the  issue  department  in  former  with  the  Issue  De- 
partment of  the  Bank  of  England  in  a  new  office  at 
Whitehall ;  and,  in  the  United  States,  with  the  Treasury 
issue  department,  in  a  building  wholly  separated  from  the 
financial  department  of  the  Treasury.  Having,  as  I 
hope,  made  these  positions  clear,  I  repeat,  the  true  scien- 
tific method  of  issuing  metallic  and  paper  money  is  for 
such  departments  to  purchase  for  gold  coin  and  notes,  as 
required,  all  the  gold  bullion  that  is  offered,  and  as  much 
silver  bullion  and  other  metal  for  subsidiary  coin  as  may 
be  asked  in  exchange  for  gold  coin  and  notes  convertible 
into  gold  only,  —  the  two  kinds  of  coin  and  notes  being 
made  interconvertible,  in  sums  not  lower  than  the  lowest 
gold  coin.  I  may  again  repeat,  this  method  will  give 
the  utmost  freedom  to  the  law  of  supply  and  demand 
in  its  action  on  all  kinds  of  money.  When  gold  coin  is 
more  valuable  than  metal,  to  an  extent  to  afford  a  profit 
or  a  motive,  it  will  be  taken  to  the  issue  office  and  sold 
for  coin  or  notes ;  and  when  the  bullion  is  worth  the 
most,  the  coin  will  be  melted  into  ingots,  or,  what  will 
generally  happen,  the  mints  will  be  stopped  until  equi- 


2  24  CURRENCY. 

librium  is  restored.  In  like  manner,  when  there  are  not 
notes  or  subsidiary  coin  enough  to  serve  the  conveniences 
of  the  people,  they  will  buy  more  with  gold  coin  or 
bullion  ;  and  when  there  are  too  many,  they  will  sell  them 
back  to  the  automaton. 

9.  Suggestions  for  a  Scientific  Monetary  System, 
intended  ultimately  to  embrace  all  civilized  coun- 
TRIES.—  The  efforts  hitherto  made  to  introduce  a  uni- 
versal monetary  system  among  the  chief  civilized,  indus- 
trial nations  of  the  world,  have  been  wholly  confined  to 
coined  money.  The  plan  I  am  submitting  embraces  also 
the  fabrication,  issue,  and  management  of  paper  money, 
based  on  metal.  Without  including  the  entire  money 
of  a  country,  metallic  and  paper,  the  universality  of  a 
system,  it  is  submitted,  will  be  shorn  of  half  its  advan- 
tages. Hence  it  seems  to  me  that  such  a  system  should 
be  perfected  in  some  one  or  more  countries,  and  be  pre- 
sented, so  completed,  for  consideration  or  acceptance  to 
others,  where  its  introduction  will  be  most  easily  effected 
without  disturbance  of  established  systems,  or  undue 
prejudices. 

10.  The  theory  of  a  universal  coinage  system  has  been 
very  ably  discussed  in  a  work  by  Mr.  J.  Meyer  of  Berlin 
(translated  by  Mrs.  C.  P.  Culver,  whose  husband  is  Clerk 
of  the  Committee  on  Coinage,  Weights,  and  Measures, 
of  the  present  Congress),  and  also  in  another  work  by 
Mr.  Aug.  Eggers  of  Bremen,  also  translated  by  Mrs.  Cul- 
ver, which  have  been  published  together  by  that  com- 
mittee on  account  of  their  great  value.  I  desire  here  to 
express  my  thanks  to  Mrs.  Culver  for  her  able  and  well- 
rendered  translation  of  these  works,  which  so  strongly 
support  the  theories  I  have  reasoned  out  in  this  treatise, 
nearly  all  of  which  was  written  three  years  and  a  half  ago, 
and  nearly  that  length  of  time  before  I  had  seen  those 
essays  on  monetary  science.     Those  who  desire  to  con- 


GENERAL  SUMMARY  OF  THE  ARGUMENT.      225 

salt  Mrs.  Culver's  translations  will  find  them  in  the  public 
libraries,  or  at  the  Treasury  Department  by  inquiring  for 
No.  8  Miscellaneous  Documents  of  the  45th  Congress, 
published  in  1879.  ^n  many  particulars  the  plan  I  had 
elaborated  is  identical  with  that  of  Mr.  Meyer,  except 
that  I  propose  at  first  to  confine  its  operations  to  the 
"  Latin  Union,"  comprising  France,  Italy,  Switzerland, 
and  Belgium,  and  the  English-speaking  countries,  em- 
bracing Great  Britain  and  her  forty  colonies,  and  the 
United  States,  containing  forty  odd  States  and  Territories. 
I  had  proposed  to  make  the  British  sovereign  the  initia- 
tory unit  of  value,  because  the  United  States  had  given 
in  to  such  a  suggestion,  or  expressed  its  willingness  to 
minimize  the  fine  metal  in  the  half-eagle  so  as  to  equalize 
it  with  the  sovereign.  I  have,  however,  since  reading 
Mr.  Meyer's  essay,  altered  my  suggestion  so  as  to  accept 
his  proposal  in  its  entirety,  as  will  be  seen  hereafter. 

11.  As  a  preface  to  the  plan  I  have  to  suggest,  I  quote 
the  following  from  the  report  of  the  Committee  of  Con- 
gress on  Coinage,  etc.,  just  referred  to,  which  is  an  ex- 
tract from  a  former  report  of  1866  (p.  13). 

"At  the  International  Congress  of  Berlin,  the  transactions  of 
which  were  reported  by  the  United  States  Commissioner,  and  sub- 
mitted to  Congress,  it  was  resolved  as  follows  :  — 

"First,  That  the  Congress  recommends  that  the  existing  units 
may  be  reduced  to  a  small  number  ;  that  each  unit  should  be,  as 
far  as  possible,  decimally  sub-divided ;  that  coins  in  use  shall  be 
expressed  in  weights  of  the  metrical  system,  and  should  be  of  the 
same  degree  of  fineness,  —  namely,  nine-tenths  fine,  and  one-tenth 
alloy. 

"Second,  That  the  different  Governments  be  invited  to  send 
delegates  authorized  to  consider  and  report  what  should  be  the 
relative  weights  in  the  metrical  system  of  gold  and  silver  coins, 
and  to  arrange  the  details  by  which  the  monetary  systems  of  differ- 
ent countries  may  be  fixed  according  to  the  terms  of  the  preceding 
proposition." 

The  report  of  1866,  quoted  further,  very  correctly  re- 
marks (p.  14  of  Report  of  1878), — 


2  26  CURRENCY. 

"The  only  indispensable  condition  of  this  uniformity  of  value 
is,  that,  in  the  standing  unit  with  its  divisions  and  multiples  used 
in  commerce,  there  shall  be  in  all  countries  an  equal  amount  of 
gold  (or  silver)  with  a  fixed  proportion  of  alloy.  Each  nation  will 
retain  its  own  devices  and  legends,  and  other  peculiarity  of  mintage.  ■ 
A  common  name  for  the  standard  unit  would  be  desirable,  but  not 
essential.  The  presence  of  a  given  amount  of  precious  metal, 
mixed  with  a  given  amount  of  alloy,  is  the  only  absolute  prerequi- 
site for  the  establishment  of  international  uniformity  of  coinage. 
The  dollar  of  the  United  States,  the  four  shillings  of  England,  and 
five  francs  of  France,  are  of  approximate  value.  Several  nations  " 
(known  as  the  Latin  Union)  "have  adopted,  under  other  names, 
the  coinage  of  France,  making  it  of  equal  value." 

At  the  time  these  favorable  views  were  expressed  by 
the  Committee  of  Congress  (1866),  indorsing  also  and 
quoting  the  recommendations  of  the  late  Chief  Justice 
Chase  made  in  1862,  while  Secretary  of  the  Treasury, 
gold  was  demonetized  and  dealt  in  as  a  commodity,  by 
reason  of  the  excessive  issues  of  inconvertible  legal-tender 
paper  money,  which  state  of  things  Mr.  Chase  considered 
favorable  to  the  initiation  of  a  general  monetary  arrange- 
ment with  other  nations.  A  small  reduction  in  the  weight 
of  gold  in  the  coinage,  when  coin  was  not  used  as  money, 
it  was  thought  would  not  be  noticeable  when  it  came 
back  as  money,  by  the  appreciation  of  legal  tenders,  to 
par.  But  we  now  have  an  overvalued  silver  dollar  coin 
which,  in  time,  will  again  demonetize  the  gold  coins ; 
that  is,  so  soon  as  the  channels  of  circulation  are  fully 
occupied  by  such  coin  added  to  the  large  volume  of 
paper  now  afloat  (postulates  23,  24).  This  circumstance 
deserves  serious  consideration  on  the  part  of  those  who 
are  laboring  on  that  committee,  as  well  as  others,  to 
promote  a  more  extended  coinage  system  in  connection 
with  the  Latin  Union.  On  the  plan  I  propose,  it  will 
be  seen  the  distribution  of  the  series  of  coins,  as  well  as 
the  paper  money,  being  left  to  the  action  of  supply  and 
demand,  by  a  purely  automatic  machine,  the  amount  of 


GENERAL  SUMMARY  OF  THE  ARGUMENT.       227 

each  series  of  coins  and  paper  will  be  perfectly  regulated. 
The  plan  itself  is  so  simple,  and  so  easily  put  in  operation, 
that  any  man  of  ordinary  capacity  can  comprehend  it  in 
a  very  short  time.  The  extracts  from  reports  of  Congres- 
sional Committees  and  National  Commissioners  will  pave 
the  way  for  a  more  complete  understanding  of  it. 

12.  PROPOSED  PLAN. 

First,  Make  gold  the  universal  standard  of  the  measure 
of  value. 

Second,  Make  the  gold  coins  nine-tenths  fine  and  one- 
tenth  alloy. 

Third,  Abolish  all  note  issues  by  banks  and  the  Treas- 
ury. 

Fourth,  Establish  in  each  country  an  independent  issue 
department. 

Fifth,  Transfer  the  mints  to  these  departments  in  the 
several  countries. 

Sixth,  Agree  on  a  unit  of  value,  say,  one  and  a  half 
grains  gold. 

Seventh,  Preserve  on  one  side  of  each  coin  the  present 
national  devices. 

Eighth,  Agree  on  a  common  device  for  the  obverse 
sides  of  the  coins. 

Ninth,  Each  department  to  issue  certain  specified  de- 
nominations of  notes,  not  lower  in  amount  than  the  lowest 
gold  coin. 

Tenth,  Each  department  to  gradually  call  in  the  out- 
standing coin  and  paper  money,  filling  their  places,  pari 
passu,  with  new  coins,  which  can  be  effected  by  limitation 
in  the  volume  of  money. 

Eleventh,  The  method  of  the  issue  will  be  to  exchange 
coin  and  paper  money  for  gold  bullion  at  its  market  value, 
less  a  small  agio,  or  seigniorage,  to  cover  cost  of  manage- 
ment. 


228  CURRENCY. 

Twelfth,  Each  department  to  issue  such  denominations 
of  silver  and  other  subsidiary  coins  as  may  be  agreed  on, 
and  of  one  degree  of  fineness. 

Thirteenth,  These  subsidiary  coins  to  be  treated  the 
same  as  paper  money ;  that  is,  to  be  sold  for  their  face 
value  in  gold  coin,  and  both  paper  and  subsidiary  coin  to 
be  redeemable  by  the  several  departments  issuing  them, 
at  par  in  gold  coin,  when  presented  at  the  chief  office  or 
any  agency,  in  sums  not  lower  than  the  lowest  gold  coin. 

Fourteenth,  Each  department  to  establish  branches,  or 
agencies,  to  suit  the  convenience  of  the  public. 

Fifteenth,  The  question,  whether  a  limited  amount  of 
the  accumulation  of  gold  coin  and  bullion,  that  will  accu- 
mulate, may  be  disposed  of  to  purchase  national  securities, 
and  reduce  the  public  debts  of  the  several  countries,  to 
be  considered. 

Sixteenth,  Each  department  to  publish  weekly  state- 
ments of  its  operations. 

Seventeenth,  All  national  taxes  to  be  paid  in  national 
notes  and  coin,  and  be  deposited  for  safe  keeping  and  re- 
issue in  the  chief  office,  or  its  agencies,  subject  to  the 
draft  of  the  duly  authorized  Government  authorities. 

Eighteenth,  All  other  necessary  details  to  secure  effi- 
ciency to  be  agreed  on,  and  be  subject  to  joint  revision 
of  the  several  departments  after  being  established. 

Nineteenth,  Provision  to  be  made  for  receiving  into  the 
union,  or  league,  other  countries. 

13.  The  introduction  of  this  comprehensive  reform  in 
monetary  administration  presents,  in  itself,  no  practical 
difficulties.  The  objections  to  it,  like  that  to  all  reforms, 
comes  wholly  from  those  parties  interested  in  perpetuat- 
ing old  abuses,  or  unchallenged  errors  in  administration. 
Issuing  banks  and  exchange  brokers,  who  derive  many 
millions  annually  from  the  present  imperfect  systems,  will 
oppose  any  reform  in  the  methods  of  supplying  paper 


GENERAL   SUMMARY    OF   THE   ARGUMENT. 


229 


money,  and  trading  on  exchanges.  They  claim  that  they 
hold  vested  rights  in  the  premises,  and  hence  use  all  their 
power  to  defeat  reform  measures. 

14.  If  we  accept  Mr.  Meyer's  proposition  to  make  one 
and  a  half  grams  of  fine  gold  the  unit,  or  initial  coin  of 
the  system,  which  I  think  the  best  of  any  of  the  various 
propositions  I  have  examined,  the  following  comparative 
table  will  exhibit  the  result. 


ENGLISH 

MONEY. 

FRENCH    MONEY. 

AMERICAN    MONEY. 

ij  grams  =  4 s.  i.i6</. 

=  U 

=    S/r 

i6.6<:.=    5  fr. 

=  $    99-7     =$I«> 

3        "      =   8 

2.32 

=  1" 

=  10 

33.3     =  10  " 

=     I  99.4    =        2   OO 

33       "      =I° 

2.9 

1  << 

—  5 

=  12 

63        =  12  " 

=    2  49.25  =       2   50 

75       "       =2° 

5-3 

=  1" 

=  25 

83-3     =  25  " 

=   4  98-5    =      5  00 

15        "      =4° 

11.64 

=  2  " 

=  5i 

66.6    =  50  " 

=   9  96.92  =    10  00 

30        "      =81 

11.28 

=  4" 

=103 

33.2    =100  " 

=  1993.84=    2000 

15.  In  comparison  with  the  proposed  new  standard 
measure,  it  will  be  seen,  by  the  above  table,  the  English 
and  French  coins  are  at  present  overvalued  the  amounts 
set  down  in  the  left-hand  columns,  and  the  American 
coins  are  slightly  undervalued.  The  former  contains  so 
much  too  little  gold,  and  the  latter  too  much.  For  in- 
stance, the  English  sovereign  would  have  to  have  added 
five  pence  and  three-tenths  in  value  of  metal  in  order  to 
make  it  up  to  seven  and  a  half  grams  of  the  new  pound  ; 
the  French  twenty-five  franc  piece  would  require  an 
increase  of  83.3  centimes  of  metal ;  and  the  American 
half-eagle  would  have  to  be  reduced  1.5  cents  in  order 
to  bring  the  three  coins  to  the  equal  weight  of  seven  and 
a  half  grams.  The  change  in  the  American  gold  coin 
would  be  so  small  as  to  be  of  no  practical  account.  The 
percentage  of  deficit  on  the  English  and  French  coins 
of  the  present  would  be  respectively  2.21  and  3.31  per 


23O  CURRENCY. 

cent.  On  the  present  gold  circulation  of  these  countries 
this  would  entail  a  considerable  loss  on  these  Govern- 
ments, which  might  be  made  good  by  a  seigniorage  charge 
on  the  new  issues.  The  question  of  seigniorage  will  be 
briefly  considered  in  Chap.  XXVII.  By  this  method 
the  present  gold  coins  might  at  once  be  made  to  legally 
represent  the  new  standard  by  contraction  of  their  vol- 
ume sufficient  to  raise  their  money  value  above  their 
bullion  value,  to  prevent  the  new  coins  being  melted. 
Of  course  this  would  cause  a  slight  fall  in  the  prices 
of  things  measured  by  the  new  standard,  which  would 
necessarily  ensue  under  any  plan  whatever.  I  need 
hardly  say,  such  a  change  must  be  made  gradually,  so 
as  not  to  be  perceptible  to  those  engaged  in  any  of  the 
industrial  pursuits.  To  enable  those  who  care  to  verify 
the  foregoing  calculations,  I  would  say  that  one  gram  is 
equal  to  15432  grains,  and  one  grain  to  0.0648  gram. 
We  may  call  the  gram  in  ordinary  estimates  15.5  grains. 
16.  Mr.  Meyer  has  also  shown  how  readily  the  sub- 
sidiary coins  —  silver,  nickel,  and  copper  —  may  be  har- 
monized in  most  countries,  and  I  refer  to  his  work  on 
that  subject.  By  being  made  convertible  into  gold  stand- 
ard coin,  at  the  will  of  the  holder,  in  sums  not  less  than 
the  lowest  gold  coin,  and  being  sold  for  gold,  or  paper, 
convertible  into  gold  by  the  several  departments,  the 
automatic  process,  operated  by  the  force  of  the  natural 
laws,  will  always  regulate  the  issue  and  conversion  ac- 
cording to  the  exigencies  of  industry,  both  as  to  the 
denominations  and  the  amount  of  money.  Hence,  the 
question  of  the  amount  of  alloy  or  overvaluation  of  silver 
coins  would  be  of  little  consequence.  We  treat  them 
as  promissory  notes  engraved  on  a  valuable  metal.  Mr. 
Meyer  proposes  to  make  silver  coins  six  of  fine  silver 
and  one  of  alloy  of  copper,  counting  the  copper  as  silver. 
The  profit  on  silver  then  would  compensate  for  the  loss 


GENERAL   SUMMARY   OF   THE   ARGUMENT.  23 1 

on  gold  ill  countries  where  the  standard  weight  shall  be 
raised.  The  American  412^  grain  silver  dollar  is  just 
now  about  1 1  per  cent  overvalued.  Under  the  metric 
system  proposed,  they  could  not  circulate  in  the  United 
States  so  long  as  one  and  two  dollar  notes  are  issued, 
because  the  people  prefer  the  notes  to  silver  dollars,  on 
account  of  their  lightness  and  greater  convenience. 

17.  The  amount  of  one  and  two  dollar  notes  in  cir- 
culation in  the  United  States  on  the  first  of  November, 
1S78,  was  $47,567,816.  In  order,  therefore,  to  make 
the  silver  dollars  circulate  before  the  Government  shall 
be  compelled  to  pay  them  out  by  the  withdrawal  of  all 
the  gold  reserve,  it  will  be  necessary  to  call  in  all  the 
small  notes,  and  give  the  silver  dollars  a  forced  circula- 
tion. But  if  the  new  plan  of  interconvertibility  between 
silver  and  other  subsidiary  coins  and  gold  coins  and 
paper  convertible  into  gold  should  be  adopted,  and  no 
notes  under  the  lowest  gold  coin  are  issued,  there  will  be 
room  for  probably  twenty  million  silver  dollars,  in  addi- 
tion to  the  lower  denominations  of  that  and  other  metal- 
lic coins,  in  the  United  States. 

iS.  With  silver  coins  made  on  a  scale  of  one-seventh 
overvaluation,  and  convertible  into  gold  as  so  many  me- 
tallic notes,  it  would  scarcely  be  needful  to  provide  for 
the  possible  contingency  of  such  a  change  in  the  relative 
value  of  the  two  metals  as  would  lead  to  the  hoarding  or 
melting  down  of  silver  coin.  In  other  words,  it  would 
hardly  be  necessary  to  guard  against  the  bullion  value  of 
silver  rising  above  the  coin  value,  measured  by  gold. 

19.  As  for  the  new  names  to  be  given  to  the  new 
international, coins,  Mr.  Meyer  has  suggested  the  adop- 
tion of  the  term  "dollar,"  and  the  various  coins  to  be 
specified  by  the  multiples  and  divisions  of  the  dollar. 
While  we  see  foreigners  agreeing  on  the  desirability  of 
using  the  term  known  and  universally  used  in  America, 


232  CURRENCY. 

it  is  surprising  to  find  Americans  desirous  of  inventing 
new  and  before  unknown  names.  I  indorse  Mr.  Meyer's 
proposal,  with  this  suggestion,  that  the  gold  coins  shall  be 
called  eagles,  half-eagles,  quarter-eagles ;  and  so  on  the 
ascending  scale,  —  double  and  quadruple  eagles.  The 
eagle,  as  well  as  the  dollar,  is  known  all  over  the  Euro- 
pean continent ;  but  the  term  "  stella,"  as  suggested  by 
some,  is  unknown  and  "  unknowable." 

VIEWS  OF  HON.  JOHN  SHERMAN,  SECRETARY  OF  THE  TREAS- 
URY, FORMERLY  UNITED  STATES  SENATOR  FROM  OHIO,  ON 
FREE   TRADE    AND    A    UNIVERSAL    SYSTEM    OF    COINAGE. 

20.  The  following  extract  from  the  report  made  by 
Senator  Sherman  (now  Secretary  of  the  Treasury)  in  1868 
very  forcibly  expresses  some  of  the  advantages  to  be  de- 
rived from  a  universal  system  of  coinage.  I  am  indebted 
to  the  very  valuable  work  of  the  late  Dr.  Linderman,  Di- 
rector of  the  United  States  Mint,  1877,  for  it,  as  well  as 
for  much  other  useful  information  on  the  subject  of  the 
coinage  of  money. 

"  Every  advance  toward  a  free  exchange  of  commodities  is  an 
advance  in  civilization.  .  .  .  Every  obstruction  to  commerce  is  a 
tax  upon  consumption ;  every  facility  to  a  free  exchange  cheap- 
ens commodities,  increases  trade  and  production,  and  promotes 
civilization.  .  .  .  No  single  measure  will  tend  in  this  direction  more 
than  the  adoption  of  a  fixed  international  standard  of  value,  by 
which  all  products  may  be  measured,  and  in  conformity  with  which 
the  coin  of  a  country  may  go  with  its  flag  into  every  sea  and  buy  the 
products  of  every  nation  without  being  discounted  by  the  money- 
changers. 

"  Gold  with  us  is,  like  cotton,  a  raw  product.  .  .  .  Every  obstruc- 
tion to  its  free  use,  such  as  the  necessity  of  its  recoinage  when  pass- 
ing from  nation  to  nation,  diminishes  its  value ;  and  that  loss  falls 
on  the  United  States,  the  country  of  production. 

"The  United  States  is  a  new  nation,  and  therefore  a  debtor 
nation.     By  placing  ourselves  in  harmony  with  the  money  units  of 


THE    PROPOSED    UNIVERSAL    MONETARY    SYSTEM.        233 

creditor  nations,  we  promote  the  easy  borrowing  of  money  and  pay- 
ment of  debts  without  the  loss  of  recoinage  or  exchange,  always 
paid  by  the  debtor.  The  technical  rate  of  exchange  between  the 
United  States  and  Great  Britain,  growing  out  of  the  deficient  nom- 
inal values  of  coin,  is  a  standing  reproach,  which  can  only  be  got 
rid  of  by  unifying  the  coinage  of  the  two  countries  when  both  the 
real  and  technical  rates  of  exchange  will  be  at  par,  etc." 

This  difficulty,  as  stated  in  the  last  paragraph  quoted, 
was  in  part  obviated  in  the  United  States  by  an  Act  of 
Congress,  which  went  into  effect  Jan.  i,  1874,  that  re- 
quires the  Secretary  of  the  Treasury  annually  to  publish 
the  values  of  the  standard  coins  in  circulation  of  the  vari- 
ous nations  of  the  world,  as  estimated  by  the  Director  of 
the  Mint. 


CHAPTER  XXVI. 


THE      PROPOSED     UNIVERSAL     MONETARY     SYSTEM     FURTHER 
CONSIDERED. SUBSIDIARY    COINS   TO    BE    CONVERTIBLE. 

i.  The  plan  I  have  reasoned  out  for  the  establishment 
of  national  or  state  issue  departments  having  sole  power 
to  issue  and  manage  both  metallic  and  paper  money, 
whether  confined  to  one  country,  or  extended  to  several 
or  all  countries  in  the  civilized  world,  I  claim  to  be 
the  only  one  yet  devised  which  proposes  a  complete, 
practical,  and  scientific  separation  of  the  issue  and  man- 
agement of  currency  from  the  financial  operations  of 
individuals  and  communities.  It  seems  to  me  to  be  the 
only  one  that  will  successfully  and  permanently  preserve 
the  currency  —  metallic  and  paper  —  of  a  country  from 
those  periodic  derangements  growing  out  of  periodic 
panics  and  crises,  often  lasting  many  years,  or  half  a  life- 
time as  in  the  case  of  the  suspension  of  the  Bank  of 
England  from  1797  to  182 1,  and  in  America  for  about 


234  CURRENCY. 

one-half  of  the  time  since  the  existence  of  national  gov- 
ernment. I  regard  the  adoption  of  the  plan,  whenever 
it  shall  take  place,  as  the  first  step  towards  checking 
the  incipient  causes  of  panics  leading  to  those  long  and 
frequent  derangements  of  industrial  affairs  which  have 
become  chronic  in  Great  Britain.  A  sound  currency, 
incapable  of  derangement  itself,  most  certainly  will  prove 
a  great  blessing  to  mankind,  even  though  it  may  not 
wholly  exterminate  the  evils  and  consequences  of  over- 
trading. It  will  also  most  certainly  preserve  the  great 
and  indispensable  measure  of  values  from  being  so  often 
forced  out  of  circulation,  and  avert  the  evils  of  a  depre- 
ciated, fluctuating,  and  uncertain  measure  taking  its 
place. 

2.  I  propose  briefly  to  discuss  the  question  of  sub- 
sidiary coin,  which  has  so  often,  and,  as  I  conceive,  very 
unnecessarily,  been  left  in  an  unsatisfactory  condition  in 
most  countries.  No  system  of  currency  can  be  regarded 
as  sound  or  safe  which  does  not  provide  a  method  that 
shall  exactly  mete  out  to  the  public  the  necessary  quan- 
tity of  subsidiary  coin.  To  create  such  a  system,  it  is 
needful  to  devise  a  self-acting  regulator.  The  system 
must  be  based  on  the  theory  that  supply  and  demand,  or 
the  great  predominating  equation  in  human  industries, 
shall  determine  the  method  of  providing  such  coin. 
The  laws  of  industry  alone  can  regulate  the  volume 
of  this  portion,  as  they  will  do  of  the  rest  of  the  cur- 
rency. Under  the  proposed  system,  all  kinds  of  subsid- 
iary coin  must,  like  paper  money,  be  made  convertible 
into  the  standard  gold  coin  at  par. 

3.  Now,  if  such  subsidiary  coins  are  made  convertible, 
at  the  pleasure  of  the  holder,  into  standard  gold  coin, 
and  are  sold  for  the  latter  at  par,  it  is  obvious  that  their 
position  in  the  monetary  system  will  be  the  same  as  that 
of  paper,   except  that  they  will  have   in   themselves   a 


THE    PROPOSED    UNIVERSAL    MONETARY    SYSTEM.        235 

market  value  equal  to  the  amount  of  raw  material  of 
which  they  are  made.  But  the  same  principles  will  gov- 
ern the  quantity  needed  by  the  community  for  industrial 
purposes  as  in  the  case  of  paper.  Being  an  indispensa- 
ble as  well  as  a  costly  tool,  the  public  will  purchase 
only  so  many  subsidiary  coins  as  are  needed.  Like 
paper,  if  too  many  are  taken  out,  the  surplus  of  supply 
above  legitimate  demand  will  presently  be  returned  and 
exchanged  for  gold,  for  home  or  foreign  use,  as  the  case 
may  be.  There  will  be  nothing  left  to  the  judgment  or 
will  of  the  managers  of  the  issue  department.  It  will 
be  an  automatic  machine  regulating  itself.  Can  any 
one  gainsay  this  reasoning,  or  doubt  its  amounting  to 
demonstration  as  clear  as  mathematics? 

4.  In  respect  to  the  proposed  universal  monetary  sys- 
tem, one  of  the  results  of  no  little  importance  would  be 
the  establishment  of  a  method  by  which  the  equilibrium 
of  the  exchanges  between  the  countries  entering  the 
league  would  be  perpetually  maintained,  precisely  in  the 
same  manner  as  the  exchanges  between  domestic  traders. 
Though  human  ingenuity  has  not,  for  obvious  reasons, 
been  able  to  construct  a  perpetual  self-moving  machine, 
the  laws  of  nature  everywhere  develop  perpetual  action. 
A  system,  therefore,  founded  on  these  laws,  and  which  is 
operated  and  kept  in  motion  by  them  through  human 
agencies  bound  to  obey  them,  is  quite  another  affair  from 
those  systems  which  are  operated  by  personal  and  arti- 
ficial impulses  and  considerations,  and  for  the  private 
gain  of  corporations,  and  to  satisfy  the  greed  of  indi- 
viduals. 

5.  Furthermore,  under  the  system  I  propose,  the  mo- 
tive for  using  coin  as  merchandise  for  settling  foreign  and 
domestic  indebtedness,  and  for  purchasing  other  com- 
modities, would  be  minimized  in  its  force  so  as  to  place 
its  position  in  these  respects  at  the  bottom  of  the  list 


236  CURRENCY. 

of  commodities.  But  if,  under  a  universal  system,  the 
coin  of  one  country  found  its  way,  through  the  medium 
of  travellers  or  any  other  cause,  into  other  countries,  no 
inconvenience  would  arise,  inasmuch  as  the  perpetual 
tendency  to  equilibrium  imparted  by  the  free  action  of 
supply  and  demand  would  lead  to  an  equable  distribu- 
tion through  all  the  countries  which  have  entered  into  the 
league.  There  being  the  smallest  motive,  in  comparison 
with  other  things,  for  exporting  coin,  for  the  reasons 
stated,  the  coin  of  each  country  would,  as  a  rule,  remain 
at  home,  where  the  national  stamp  on  one  side  would  be 
better  understood,  and  the  uses  of  letters  of  credit,  cir- 
cular notes,  and  bills  of  exchange,  would  always  be  pre- 
ferred by  travellers  as  well  as  merchants.  The  interna- 
tional coinage  should,  however,  know  no  national  bounds. 
Its  object  is  universality. 

6.  In  order  to  invoke  an  unprejudiced  and  candid 
consideration  of  the  arguments  presented,  I  wish  to 
observe,  that  I  have  endeavored,  in  this  chapter  and 
throughout  the  entire  work,  to  subject  the  principles  I 
have  postulated  to  the  closest  logical  reasoning,  both  by 
induction  and  deduction,  as  well  as  by  the  citation  of 
generally  admitted  facts.  We  are  as  much  bound  to 
accept  truths  thus  established  as  we  are  such  as  are 
demonstrated  by  the  (so-called)  exact  sciences.  It  is  a 
mistake  to  draw  a  distinction  between  the  two  methods 
of  logic  or  reasoning.  Both  have  equal  force  ;  and  only 
those  who  are  ignorant  of  both,  set  up  what  is  called 
"practice"  against  "theory."  No  practice  not  founded 
on  demonstrated  theory  is  reliable,  or  assured  to  be  the 
best  for  even  those  who  follow  it.  Men  who  manage 
banks  or  ships,  or  deal  in  goods  of  any  kind,  are  the 
least  to  be  trusted,  unless  they  have  mastered  the  compli- 
cated principles  of  political  economy.  Hence  it  is,  that 
the  theorizing  of  what  are  called  "  practical  men  "is  so 


THE   PROPOSED   UNrVERSAL   MONETARY    SYSTEM.       237 

generally  at  fault.  Their  theories  are  simple  dogmas, 
and  no  better  than  the  opinions  of  the  two  knights  who 
quarrelled  and  fought  because  each  had  seen  only  one 
side  of  the  shield,  where  they  had  chanced  to  meet,  and 
had  in  consequence  perceived  but  half  the  truth  (see 
chapter  on  Value). 

7.  It  will  now  be  seen,  that,  in  order  to  reach  a  per- 
fectly scientific  solution  of  the  money  question,  it  is  very 
desirable  to  establish  the  proposed  monetary  league  of 
nations,  and  leave  the  currency  to  distribute  itself  under 
supply  and  demand.  Though  such  a  system  as  I  have 
shown  in  my  reasoning  is  perfectly  applicable  and  neces- 
sary to  nations  like  Great  Britain  and  the  United  States,  it 
would  receive  its  highest  development  and  efficacy  under  a 
widely  or  universally  extended  international  league.  Some 
other  great  advantages  of  such  a  system,  not  explicitly 
stated  before,  will  be,  that  there  can  never  be  either  too 
much  or  too  little  money,  metallic  or  paper,  in  any  coun- 
try belonging  to  the  league.  There  will  never  be  "  over- 
issues "  of  paper  money.  The  great  overruling  law  of 
nature,  supply  and  demand,  will  maintain  an  equilibrium 
of  value  and  of  distribution.  If  financial  or  industrial 
crises  occur  in  one  country,  or  in  all,  their  effects  will  be 
minimized  by  having  a  solid,  unchangeable  measure  of 
values  always  assured. 

8.  The  formulation  of  an  Act  of  Parliament  or  of  Con- 
gress, and  of  a  treaty  to  extend  the  system  to  other  coun- 
tries, will  not  be  difficult  for  legislators,  statesmen,  or 
diplomats,  when  they  have  come  to  master  the  subject 
itself.  As  to  the  establishment  of  a  league  amongst  the 
English-speaking  and  the  (so-called)  Latin  nations,  there 
does  not,  as  shown  in  the  last  chapter,  seem  to  be  any 
serious  difficulties.  We  are  already  making  some  progress 
towards  the  adoption  of  a  universal  system  of  weights  and 
measures,  which  is  surrounded  with  very  much  greater 
obstacles. 


238  CURRENCV. 

9.  All  empirical,  statistical,  and  philosophical  or  scien- 
tific reasoners,  aljke  admit  the  long-continuing  abuses  of 
not  properly  guarded  or  restricted  issues  of  bank  and 
government  notes,  and  deplore  the  vast  losses  and  injury 
to  society  directly  traceable  to  this  cause.  But  nearly  all 
hug  the  delusive  system  so  subject  to  abuse.  Few  may 
at  first  agree  with  me  in  the  necessity  of  adopting  the 
heroic  method  of  a  surgical  operation  of  cutting  loose 
from  banks  of  issue,  and  in  the  creation  of  a  sound  and 
healthy  system.  But  the  time  will  surely  come  when  cor- 
rect principles  will  prevail.  At  present  the  enemies  of 
such  a  system  are  prejudice,  ignorance,  and  a  mistaken 
notion  that  bank  notes  are  a  source  of  profit  to  banks ; 
though  it  has  been  shown,  that,  on  the  whole,  banks,  as 
well  as  the  public,  have  been  the  losers  by  their  issue  :  in 
a  word,  by  acting  on  a  mistaken  view  of  self-interest. 
These  lions  must  be  got  out  of  the  path  or  crushed  be- 
fore sound  theories  can  be  reduced  to  practice. 

10.  Referring  once  more  to  the  uncertain  deductions 
drawn  from  statistical  and  actuarial  lore,  I  cannot  help 
regarding  the  attempts  of  professional  economists  to  use 
such  methods,  instead  of  relying  on  logical  reasoning  to 
found  theories  for  legislation  and  the  conduct  of  indus- 
trial affairs,  as  most  unfortunate.  When  we  leave  the 
field  of  scientific  deduction  and  induction  to  mere  em- 
piricism, and  reason  from  such  masses  of  crude  statistics 
of  prices  as  have  been  collected  by  Mr.  Tooke,  Mr.  New- 
march,  and  others,  we  place  ourselves  in  the  position  of  a 
ship  in  a  boundless  ocean,  without  rudder,  compass,  or 
instrument  of  any  kind.  Such  tables  of  statistics  of  aver- 
age values,  or  approximations  of  value,  are  of  no  real  use 
to  science ;  and,  so  far  as  they  seem  to  contradict  or  do 
not  coincide  with  scientific  principles,  may  be  discarded 
as  incorrect.  There  are  cases,  such  as  the  statistics  of  life, 
where  close  accuracy  can  be  attained,  and  where  valuable 


THE    PROPOSED    UNIVERSAL   MONETARY    SYSTEM.        23Q 

results  to  an  important  branch  of  business  have  followed. 
Statistics  or  approximations  of  the  products  of  labor, 
prices,  etc.,  are  of  doubtful  value  to  traders,  and  are  often 
misleading,  as  in  the  case  of  crops,  merchandise,  etc. 
Cut  they  are  of  no  more  value  to  the  science  of  political 
economy  than  to  that  of  geometry.  The  economist  has 
to  deal  with  principles ;  and,  if  he  wants  to  use  figures, 
he  can  assume  such  as  he  desires,  just  as  a  mathematician 
starts  from  certain  assumed  facts  for  the  purpose  of 
demonstrating  his  problems.  To  attempt  to  build  up  a 
system  of  political  economy,  wholly,  or  even  in  part,  on 
statistics  of  prices  or  trade,  is  hardly  wiser  than  to  en- 
deavor to  build  a  pyramid  with  its  apex  downwards,  or 
begin  building  a  house  at  the  top.  Statistics  of  bank 
issues  and  discounts,  being  ascertainable  facts,  may,  how- 
ever, be  used  for  illustration,  and  to  show  the  consequences 
of  erroneous  systems  of  economy  established  by  legislation 
granting  monopolies  and  privileges  to  private  parties.  We 
may  show,  in  this  way,  the  folly  of  delegating  to  banks  and 
private  individuals  the  prerogative  of  issuing  paper  money, 
or  the  exclusive  privilege  of  conducting  given  industries 
of  any  kind.  We  may  show  the  vast  losses  sustained  by 
society,  in  consequence  of  violating  correct  principles, 
established  by  logic  and  reasoning. 

1 1 .  But  when  we  come  to  reason  out  and  determine 
how  certain  phenomena  are  due  to  certain  causes ;  how, 
for  instance,  money,  the  standard  of  value,  measures  and 
differentiates  the  values  of  other  things,  we  gain  nothing, 
and  only  confuse  ourselves,  by  trying  to  lug  in  the  statis- 
tics of  production,  labor  and  capital,  or  machinery.  What 
appear  to  be  exceptions  to  scientific  principles  are  really 
only  unascertained  laws  of  nature ;  and  that  branch  of 
inquiry  is  to  a  large  extent,  as  yet,  a  terra  incognita, 
where  statistics  are  only  confusing.  I  leave  this  field  for 
others  to  cultivate.     How  the  market  values  of  products 


240  CURRENCY. 

in  the  course  of  production,  manufacture,  and  distribu- 
tion are  acted  on  by  supply  and  demand  and  by  each 
other,  is  a  question  still  affording  scope  for  thought  and 
reasoning.  We  have  economists  who  have  attempted  by 
statistics  to  show  how  much  paper  money  is  needed  per 
capita;  whereas  population  has  little  or  nothing  to  do 
with  the  matter,  it  being  one  wholly  governed  by  the 
industry  of  a  people  and  their  productions. 

12.  I  have  several  times,  in  the  course  of  this  work, 
urged  the  desirability  of  issuing  one  pound,  and  even 
lower  notes,  to  occupy  the  place  of  gold  coin.  Some 
recent  writers,  particularly  in  the  United  States  since  spe- 
cie payments  have  been  resumed,  are  arguing  against  the 
uses  of  small  notes.  They  say,  "  small  notes  should  not 
be  issued,  because  they  almost  invariably  drive  out  of 
circulation  all  coin  of  the  same  denominations  to  the  full 
extent  of  their  issue."  This  is  very  bad  logic.  The  ability 
to  circulate  paper  money,  convertible  into  coin,  no  odds 
of  what  denominations,  depends  on  the  preference  which 
the  people  have  for  the  paper  as  a  tool  of  industry.  It  is 
wholly  a  question  of  convenience  ;  and  the  denominations 
of  paper  money  should  be  determined  by  that  great  natu- 
ral law  of  industry,  so  often  quoted,  but  so  little  regarded 
in  theory  and  practice,  supply  and  demand.  Those  who 
think  that  an  arbitrary  and  artificial  method  of  doling 
out  to  the  public  what  the  public  itself  ought  to  be  left 
free  to  determine,  do  violence  to  sound  principles  and 
good  logic.  The  very  purpose  of  a  one  pound  or  a  one 
dollar  note  is  to  meet  the  public  demand  for  such  notes ; 
and,  if  the  result  is  "to  drive  out  of  circulation,"  or,  more 
correctly  speaking,  keep  the  coins  representing  the  de- 
nominations in  question  in  reserve,  it  is  only  what  large 
notes  do.     This  argument  admits  of  no  rejoinder. 


SOME   MORE   ECONOMIC   FALLACIES.  24 1 


CHAPTER  XXVII. 

SOME  MORE   ECONOMIC   FALLACIES. SEIGNIORAGE   A  TAX  ON 

MONEY.  —  GREAT  ADVANTAGES  OF  COIN  OVER  PAPER  MONEY. 

i.  Professor  Francis  A.  Walker,  in  his  treatise  on 
"Money,"  takes  exception  to  the  use  of  the  term  "com- 
mon measure  of  value  "  as  applied  to  money,  because 
"value  is  a  relation,"  or  a  relative  expression.     At  best 
this  objection  is  hardly  more  than  technical.     Everybody 
is  agreed  on  the  offices  performed  by  money,  which  the 
term  in  question  is  intended  to  express.     It  is,  in  fact, 
no  more  "a  relation,"  than  any  measure  of  length,  capa- 
city, or  weight.     They  are  all  relative  terms,  separating  a 
part  from  the  whole.     But  there  is  a  stronger  motive  for 
retaining  the  term  "  common  measure  of  value  "  in  re- 
spect to  money.    //  is  that  money  itself  has  been  so  made 
by  law  of  Parliament,  which  has  set  a  scale  of  denomina- 
tions, as  pounds  and  dollars,  and  defines  the  weight  of 
pure  metal  assigned  to  each.     The  definition  is  not  only 
according  to  Webster,  but  its  appropriateness  is  sustained 
by  universal  usage.      Besides,  "  measure,"  according  to 
our  best  dictionaries,  is  defined  to  be  "  a  rule  by  which 
any  thing  is  adjusted  or  proportioned  ;  proportion  ;  quan- 
tity settled ;  portion  allotted."     We  might  substitute  the 
word  "common  valuator."      The  pounds,  shillings,  and 
pence,  and  the  dollars  and  cents,  constitute  the  scales  on 
the  several  measures,  referring  to  certain  fixed  quantities 
of  metal  by  which  we  measure  all  values,  or  the  value  of 
all  things.      Hence  the  term  "common  measure."     In 
Chap.  V.,  I  have  shown  how  money  measures  such  things, 
and  metes  out  trading  power  in  the  loan  market,  as  well  as 
between  buyers  and  sellers  generally.     It  not  only  meas- 
ures values  by  comparison  with  its  own  market  value,  but 


?.^2  CURRENCY. 

it  measures  amount  or  quantity,  so  that  we  shall  know 
how  much  of  one  thing  to  give  for  a  given  quantity  of 
another  thing ;  and  how  much  trading  power  is  loaned 
or  paid  for  commodities,  or  other  things  measured  or 
weighed  by  the  scale  of  weights  and  measures.  "  Differ- 
entiator" is  a  better  term  than  denominator,  because  that 
word  accurately  defines  what  money  does  in  determining 
relative  values.  Money  can  only  be  compared  to  the 
yardstick  or  measure,  in  so  far  as,  by  its  scale  of  denom- 
inations expressed  in  coins,  it  specifies  the  proportion  and 
amount  of  the  money  itself  to  be  given  for  specified  por- 
tions of  the  thing  bargained  for.  In  other  words,  the 
yard-measure,  for  instance,  measures  the  quantity  of  cloth 
demanded  ;  and  money  measures  the  weight  of  metal  to 
be  given  therefor,  or  its  equivalent  in  something  else.  At 
this  point  the  comparison  stops. 

2.  It  is  by  attaching  the  scale  of  denominations  to 
metal,  and  making  the  coined  money  and  the  uncoined 
metal  readily  interconvertible,  that  we  secure  a  measure 
the  least  variable.  If  our  money  consisted  of  paper 
denominations  held  as  nearly  as  possible  to  the  value  of 
gold  or  other  metal  by  limitation  of  their  volumes,  we 
shall  have  a  purely  artificial  method  of  regulating  such 
value,  by  hand,  so  to  speak.  I,  therefore,  discard  this 
theory  in  favor  of  one  that  works  automatically,  which  is 
the  only  true  and  scientific  method  of  supplying  money. 
By,  however,  combining  the  standard  and  the  measure  of 
value  in  the  same  coin,  and  making  bullion  always  con- 
vertible into  coin  on  presentation  at  the  issue  office  or 
its  agencies,  there  can  never  be  wide  divergencies  between 
the  market  value  of  money  and  bullion.  The  coin  may 
be  compared  to  the  stem,  or  rod,  of  the  "  compound  pen- 
dulum," which  is  made  of  several  metals  welded  or  brazed 
together  at  the  two  ends,  so  that  the  expansibility  of  the 
metals,  being  different  under  the  influence  of  heat  and 


SOME   MORE   ECONOMIC   FALLACIES.  243 

cold,  may  counteract  the  tendency  to  variation  of  length. 
The  two  values  being  tied  together  in  one  coin,  and  the 
two  things,  money  and  coin,  being  readily  interchange- 
able by  coinage  and  melting,  the  superiority  of  the  coin 
system  at  once  appears. 

3.  All  economists  treat  money  as  a  medium  of  ex- 
change, —  indeed,  as  the  only  medium  for  the  exchange 
of  goods.  This  is  clearly  a  misconception.  Money,  as 
money,  performs  a  very  insignificant  part  in  what  is  im- 
properly called  "  exchanging  commodities,"  which  are 
distributed,  and  not  exchanged.  The  true  and  scientific 
view  is,  that  "  trading  power,"  or  floating  capital,  through 
bankers,  as  stated  in  postulates  35  and  36,  constitutes  the 
"  medium  "  of  distribution  of  labor  and  commodities.  It 
is,  therefore,  an  error  to  attribute  to  one  commodity,  either 
in  the  raw  state  of  bullion  or  its  manufactured  condition 
of  money,  the  sole  office  of  distributing  other  things, 
whose  market  value  in  the  aggregate,  being  turned  into 
trading  power  in  manner  specified,  exceeds  that  of  money 
as  thirty  to  one.  The  circulating  medium  is,  therefore, 
trading  pozver,  or  capital,  ?nade  available  by  bankers.  I 
repeat,  it  is  free  trade  in  metal,  and  free  trade  in  money, 
and  paper  based  on  money,  coupled  zvith  intcrconvertibility, 
that  determine  the  whole  question,  and  strip  it  of  all 
mystery.  Mr.  J.  Stuart  Mill,  quoted  by  Mr.  Walker,  saw 
this  dimly,  when  he  said,  "it  is  not  with  money  that  things 
are  really  purchased."  This  concedes  the  whole  question. 
But  in  the  next  sentence  Mr.  Mill  goes  on  to  say,  "  pounds, 
shillings,  and  pence  are  a  sort  of  tickets  or  orders  for 
goods."  This  expression  only  muddles  the  question  he 
came  so  near  clearing  of  its  obscurities.  These  denomi- 
nations do  not  constitute  trading  power,  or  capital,  but 
are  only  the  scale  for  measuring  it.  Bullion  and  money 
are  capital,  and,  as  such,  trading  power.  The  figures  or 
numeral  expressions  on  a  yard-measure  or  a  weighing  ma- 


244  CURRENCY. 

chine  do  not  constitute  the  yardstick  or  the  machine,  but 
indicate  the  length  or  weight  of  the  things  these  "  scaled  " 
instruments  are  applied  to. 

4.  The  theory,  so  persistently  and  almost  universally 
put  forward  by  economists,  and  quoted  by  Mr.  Walker, 
that  "  that  which  measures  value  must  itself  have  value," 
or,  as  they  sometimes  erroneously  say,  "  intrinsic  value," 
the  same  as  "  measures  of  length,  capacity,  and  weight, 
must  have  length,  capacity,  and  weight,"  is  another  fun- 
damental error  resulting  from  pushing  the  comparison 
too  far.  The  measure  of  the  value  of  money,  like  the 
value  of  commodities,  is  set  by  supply  and  demand, 
or  production  and  consumption ;  while  supply  and  de- 
mand have  nothing  to  do  with  other  measures.  With 
regard  to  "  intrinsic  value,"  I  have  stated  its  definition 
in  the  introduction  to  this  work ;  and  I  here  repeat,  this 
sort  of  value  is  not  what  we  are  dealing  with  when  we  are 
considering  money.  Intrinsic  value  is  a  quality  ;  market 
value  is  the  worth  of  a  thing  in  the  market,  as  measured 
and  differentiated  by  money.  The  intrinsic  value  of  a 
spade  is  its  fitness  to  the  purpose  of  digging  or  turning 
over  the  ground.  The  intrinsic  value  of  gold  consists  in 
its  peculiar  adaptation  to  coinage  and  all  other  uses  of 
money,  and  works  of  ornamentation  and  utility.  But  the 
market  values  of  the  spade  and  of  gold  are  alike  deter- 
mined by  supply  and  demand.  Paper  is  intrinsically 
valuable  for  purposes  of  writing,  printing,  and  for  "  paper 
money,"  but  is  comparatively  of  little  market  value. 

5.  It  must  not,  from  these  or  any  other  observations 
I  have  made,  be  supposed  that  I  discard  or  depreciate 
the  intrinsic  value  of  gold,  or  exalt  the  uses,  or  intrinsic 
value,  of  paper  for  purposes  of  money.  I  am  treating  all 
kinds  of  money  and  commodities  from  an  economic,  or 
scientific,  stand-point.  Referring  again  to  the  two  essen- 
tial offices  of  metallic  money,  namely,  the  establishing  a 


SOME   MORE   ECONOMIC   FALLACIES.  245 

standard  and  a  common  measure  of  value,  it  will  be 
seen,  that  by  combining  them  in  coin,  and  making  coin 
or  money  value  and  the  metal  value  easily  intercon- 
vertible, we  reach  scientific  accuracy,  as  far  as  is  practi- 
cable, unless  we  can  discover  some  more  stable  material 
than  gold.  The  standard  and  the  measure,  though  sepa- 
rable in  principle,  as  I  have  shown  them  to  be  in  prac- 
tice, being  so  yoked  together,  interconvertibility  causes 
their  respective  market  values  to  more  nearly  coincide, 
and  prevents  wide  oscillations  in  opposite  directions,  or 
the  market  value  of  the  one  from  oscillating  more  vio- 
lently than  that  of  the  other,  in  the  same  direction,  under 
the  action  of  supply  and  demand. 

6.  Professor  Jevons  and  others  have  pointed  out  other 
functions  or  purposes  served  by  money,  but  they  are 
more  fanciful  than  real.  One  of  these  Professor  Walker 
has  successfully  disposed  of.  Mr.  Jevons  fancies  that 
money  is  peculiarly  adapted  to  "  storing  "  or  hoarding. 
Now,  money  is  not  stored  or  hoarded  because  it  is  money, 
but  because  of  the  metal  it  contains.  It  may  be  that 
bank  notes  or  greenbacks  are  sometimes  hoarded ;  but 
it  is  because  the  owner  feels  assured  that  he  can  get  the 
metal  for  them  when  he  wants  it,  or  considers  them  "  as 
good  as  gold."  It  is  the  trading  power  that  underlies 
the  motive  of  the  act.  He  does  not  bury  the  money  be- 
cause it  is  a  measure,  but  because  the  metal  in  it  is  the 
standard  of  value. 

7.  There  has  been  much  written  and  said  about  the 
"  costliness  of  metallic  money,"  and  in  favor  of  the  supe- 
rior cheapness  of  paper  money.  Mr.  Aug.  Eggers  of 
Bremen,  whose  work,  "  Money  Reform,"  has  been  trans- 
lated by  Mrs.  C.  P.  Culver,  and  printed  by  the  committee 
of  the  House  of  Representatives  at  Washington,  along 
with  Mr.  Meyer's  "  International  Coinage,"  has  written 
well  on  this  subject,  and  has  pointed  out  some  errors 


246  CURRENCY. 

into  which  Adam  Smith  has  fallen  in  considering  paper 
money,  and  which  nearly  all  economists  have  blindly  fol- 
lowed.    One  of  these  is  the  great  economy  there  is  in 
substituting  bank  notes  as  far  as  possible  for  coin.     When 
I  wrote  my  chapters  on  that  subject,  and  others,  three 
years  ago,  I  had  not  seen  Mr.  Eggers's  or  Mr.  Meyer's 
works ;  but  I  have  gone  much  farther  in  controverting 
many  hitherto  generally  received  erroneous  conclusions 
of  distinguished  authorities.     There  is  one  point  I  have 
made  which  I  again  state  ;  namely,  that  the  public  at 
large  pay  full  gold  value  for  all  the  paper  money  they 
use,  and  it  is  only  the  issuers  who  get  the  advantage  of 
any  profit  there  may  be  in  the  substitution  of  paper  for 
metal.     I  entirely  agree  with  these  authors,  that  the  cost 
of  metallic  money  is  utterly  insignificant  in  comparison 
with  the  market  value  of  the  products  it  is  used  to  meas- 
ure and  distribute.     The  gold  in  a  sovereign  or  an  eagle 
will  last  at  least  a  hundred  years,  and  serve  to  transfer 
from  producer  to  consumer  over  ten  thousand  times  its 
value  in  goods,  supposing  it  to  serve  such  purpose  only 
one  hundred  times  a  year.     Besides  this  simple  exam- 
ple, we  may  give  another  illustration.     The  metallic  cir- 
culation of  Great  Britain  one  hundred  years  ago  was 
about  ^20,000,000 ;  and  it  has  now  risen,  as  estimated 
by  some,  to  ^120,000,000,  or  at  the   average  rate  of 
;£i, 000,000  a  year.     The  loss  from  abrasion,  or  wear, 
and  otherwise,  of  gold  coin  is  very  small,  and  for  our 
present  purposes  may  be  excluded  altogether  from  this 
calculation.     This   tool,  gold   coin,  has   therefore   been 
increased   in  volume   and  cost  at  the  average  rate   of 
;£i, 000,000  a  year  in  the  United  Kingdom.     My  own 
investigations  have  led  me  to  believe  that  this  estimate, 
which  I  have  accepted  as  the  circulation  of  gold  coin  in 
Great  Britain  and   Ireland,  is  largely  in  excess  of  the 
actual  amount.     It  is  more  than  double  the  sum  esti- 


SOME   MORE   ECONOMIC    FALLACIES.  247 

mated  to  be  in  circulation  and  in  all  the  banks  in  1868 
by  Mr.  J.  B.  McCulloch.  But  I  am  pointing  out  how 
little  it  costs  the  people  in  comparison  with  the  services 
it  renders,  and  the  amount  of  the  value  of  all  the  products 
of  capital,  labor,  and  machinery  in  the  United  Kingdom, 
and  hence  accept  the  largest  estimates. 

8.  If  we  assume  the  population  of  the  kingdom  at 
30,000,000,  and  the  increase  of  gold  coin  at  ,£1,000,000 
a  year,  we  find  that  there  is  paid,  on  an  average  for  each 
inhabitant,  eight  pence  per  annum  to  maintain  the  neces- 
sary supply.  Again,  if  we  accept  the  estimated  annual 
value  of  all  the  products  and  income  from  past  accu- 
mulations of  labor  and  capital  at,  in  round  numbers, 
^3,000,000,000,  the  annual  increase  of  gold  coin  is  only 
as  jQx  to  .£3,000  of  the  gross  annual  products  of  labor 
and  capital.  If  we  compute  the  interest  on  the  whole 
capital  invested  in  the  estimated  coin  at  four  per  cent, 
the  annual  interest  will  be  ,£5,000,000,  which  is  as  ;£i 
to  ;£6oo  of  the  annual  yield  of  labor,  machinery,  and 
capital.  Compared  with  the  population,  the  annual  in- 
terest on  the  capital  invested  in  gold  coin  is  one-sixth 
of  a  pound,  or  three  shillings  and  four  pence,  a  head ; 
and,  as  this  falls  mostly  on  capital,  the  cost  of  money  to 
the  laboring  classes  is  almost  "nil." 

9.  Now,  when  we  consider  the  services  which  this  gold 
coin  renders,  it  will  be  found  to  be  the  cheapest  of  all 
the  tools  of  industry.  Is  it  not  all  but,  if  not  altogether, 
indispensable  to  the  successful  and  easy  production  and 
distribution  of  this  vast  annual  income  of  Great  Britain, 
and  equally  so  of  other  industrial  countries?  Is  it  not 
the  solid  rock  on  which  the  nation's  industries  are  based  ? 
A  civilized  nation  can  no  more  do  without  money  than 
it  can  without  weights  and  measures,  or  spades,  ploughs, 
and  other  tools.  Whatever  fluctuations  the  value  of  labor 
and  its  products  and  the  market  value  of  capital  may 


248  CURRENCY. 

undergo,  the  gold  coin  remains  almost  unchanged  in  its 
value.  Like  a  great  rock  in  the  ocean,  it  remains,  in  its 
market  value,  unshaken  and  unchanged  by  storms  or  by 
tides  and  currents.  In  this  respect  no  product  of  indus- 
try, which  is  suitable  for  money,  can  compare  with  it  for 
stability  and  durability. 

10.  These  just  and  logical  facts  and  deductions,  to  the 
mind  capable  of  sound  reasoning,  demonstrate  the  great- 
est of  all  truths  in  monetary  science,  namely,  that  gold 
coin  is  not  only  the  best,  but  the  cheapest,  money  the 
people  can  have.  If  we  compare  this  really  inexpensive 
tool  with  inconvertible  paper,  or  even  a  silver  circulation, 
which  continually  varies  in  its  trading  power  almost  in- 
finitely, as  compared  with  gold,  we  shall  at  once  see  the 
advantages  of  the  gold  standard  over  that  of  any  other. 
This  is  more  especially  the  case  as  to  the  laboring  man 
or  woman ;  for  the  simple  self-evident  reason  that  the 
employer  or  capitalist  always  possesses,  and  generally 
exercises,  the  advantage  of  being  able  to  provide  against 
loss  by  making  a  charge  or  deduction  for  the  risk  of  such 
fluctuations  as  an  unstable  currency  is  subject  to.  This 
inevitable  result  of  such  a  measure  of  values  throws  the 
whole  loss  —  and  it  often  constitutes  a  large  percentage, 
reaching  ten  to  twenty  per  cent  of  the  wages  of  the  labor- 
ing classes  —  on  those  classes. 

11.  Furthermore,  if  we  are  going  to  do  what  so  many 
clamor  for,  namely,  make  "  money  cheap "  by  making 
"  cheap  money  "  abundant,  we  fall  into  the  palpable  error 
I  have  so  often  referred  to,  of  confounding  money  with 
capital.  "Cheap  money"  does  not  make  "  cheap  capi- 
tal." On  the  contrary,  such  "cheap  money"  as  is  clam- 
ored for  makes  capital  dear  to  the  people,  who  pay  full 
price  both  for  money  and  capital.  Who,  then,  is  bene- 
fited by  the  issue  of  inconvertible  .  money,  —  that  is, 
money,  paper  or  metallic,  not  convertible  into  the  money 


SOME   MORE    ECONOMIC    FALLACIES.  249 

made  of  the  most  stable  known  material  suited  to  coin- 
age and  convenient  circulation  and  use  ?  The  answer  is 
at  hand,  and  is  self-evident  and  indisputably  true.  It  is 
only  the  bankers,  exchange  and  other  brokers  dealing  in 
capital,  who  number  even  in  a  great  nation  only  one  in 
a  thousand,  and  a  handful  of  skilful  gamblers  and  specu- 
lators besides.  These,  then,  are  the  chief  movers  in  the 
agitation  for  inconvertible  paper  and  overvalued  silver 
money. 

12.  It  will  be  seen,  by  a  careful  consideration  of  these 
transcendently  great  truths,  that,  if  the  nation  delegates 
the  power  to  banks  and  private  parties  to  issue  paper 
money,  it  is  done  solely  with  the  view  to  enable  such  to 
make  a  profit,  while  the  public  at  large  derive  no  advan- 
tage whatever  by  the  result.  What,  then,  becomes  of  the 
theory  of  Adam  Smith  and  others,  that  the  issue  of  bank 
notes  cheapens  the  cost  of  money  to  the  nation?  By 
this  method  of  cheapening  money,  as  I  have  many  times 
shown,  you  are  only  giving  a  dangerous  monopoly  to  a 
very  limited  class,  who  have  always  been  led  by  motives 
of  gain,  or  downright  greed,  to  abuse  it. 

13.  The  question  of  seigniorage  has  occupied  the  atten- 
tion of  most  writers  on  monetary  science,  and,  like  many 
other  things  connected  with  the  fabrication  and  supply 
of  money,  has  very  often  been  the  subject  of  much  bad 
logic.  Mr.  Ricardo  was  an  advocate  of  a  heavy  seignior- 
age charge  for  supplying  coin  for  bullion,  —  even  as  high 
as  fifty  per  cent  of  the  market  value  of  the  bullion.  Let 
us  inquire  what  is  seigniorage,  and  then  determine  its 
effects  on  the  currency.  As  defined  by  Mr.  Ricardo 
and  others,  it  is  a  charge  made  to  the  owners  of  bullion 
for  coining  the  same  into  money,  or,  what  is  the  same 
thing,  for  giving  out  by  the  state,  at  the  mint,  coined 
for  uncoined  metal, — the  manufactured  for  the  unmanu- 
factured article.     It  is,  therefore,  in  the  nature  of  a  tax 


250  CURRENCY. 

imposed  on  one  of  the  most  necessary,  if  not  indispen- 
sable, tools  of  industry,  or  which  nobody  can  do  without. 
Now,  as  all  taxes  imposed  by  the  state  on  the  products 
of  labor  are  direct  and  artificial  interferences  with  the 
natural  order  of  things,  it  becomes  the  special  duty  of 
the  statesman  to  select,  as  far  as  possible,  such  articles 
for  taxation  as  are  either  luxuries,  or  tend  to  engender 
vice  and  idle  or  bad  habits.  When  Mr.  Ricardo  argued  in 
favor  of  a  high  tax  on  bullion  when  offered  in  exchange 
for  money,  he  was  simply  adding  so  much  to  the  cost 
of  coined  or  manufactured  money.  If  fifty  per  cent  is 
admissible,  as  contended  for  by  him,  its  effect  on  the 
offices  of  money  would  be  to  diminish  the  quantity  of 
money  demanded  in  exchange  for  bullion,  and  thus  in- 
crease its  trading  power  pro  tanto,  or,  in  other  words,  to 
lessen  the  value  of  labor  and  its  products,  and  of  all 
things  possessing  market  value,  in  a  like  degree. 

14.  According  to  the  principles  I  have  endeavored  to 
demonstrate,  money,  of  all  the  tools  of  industry,  is  the 
one  that  ought  to  be  left  free  from  state  or  bank  influ- 
ences. It  is,  par  excellence,  the  one  article  to  be  left  to 
the  free  and  undisturbed  action  and  regulation,  as  to  its 
volume  and  circulation,  of  the  natural  laws  of  industry. 
I  have  contended  that  its  supply  should  be  automatic,  so 
that  those  who  have  bullion  to  sell  may  exchange  it  for 
coin,  when  such  exchange  will  afford  a  sufficient  profit ; 
and,  on  the  other  hand,  if  the  price  of  bullion  is  such  in 
the  open  markets  as  to  yield  a  profit,  the  owners  of  the 
coined  or  manufactured  money  may  melt  it  into  bullion. 
A  heavy  tax  would,  it  must  be  seen,  interfere  seriously 
with  the  scientific  supply  of  this  indispensable  tool.  Better 
far  to  tax  spades,  ploughs,  and  spinning-jennies,  than 
money. 

15.  I  have  not  discussed  the  effect  which  the  con- 
sumption of  the  precious  metals,  for  purposes  other  than 


INDUSTRIAL    CRISES.  THEIR    CAUSES   AND    EFFECTS.    25 1 

currency,  has  on  the  ebb  and  flow  of  money  under  the 
influence  of  supply  and  demand.  Probably  the  consump- 
tion in  the  arts  and  manufactures  is  quite  as  equable  as 
for  purposes  of  currency.  Though  the  methods  of  ob- 
taining the  precious  metals  are  continually  undergoing 
improvement,  and  being  cheapened  thereby,  the  increased 
demand  for  them  for  currency,  and  works  of  utility  and 
art,  as  well  as  mere  ornament,  probably  keeps  pace  with 
the  supplies.  The  increase  of  wealth  in  modern  times 
has  been  immense,  and  this  has  led  to  an  equal  increase 
in  the  demand  for  the  precious  metals.  The  statistics 
of  consumption  of  the  precious  metals,  both  for  currency 
and  in  the  arts,  like  most  such  statistics,  are  only  guess- 
work after  all,  and  cannot  add  much  to  the  science  of 
money ;  and  the  founding  of  a  per  capita  theory  of  cir- 
culation is  no  better  than  to  found  it  on  the  number  of 
codfish  taken  annually  from  the  sea. 


CHAPTER   XXVIII. 

INDUSTRIAL   CRISES. THEIR   CAUSES  AND   EFFECTS. 

i.  In  considering  this  subject,  we  have  first,  To  define 
what  is  meant  by  a  crisis  in  industrial  pursuits ;  second, 
What  are  the  causes  ;  third,  What  their  effects  on  society ; 
and  fourth,  To  ascertain  whether  the  science  of  political 
economy  has  yet  discovered  a  remedy  for  the  predis- 
posing causes,  or  a  method  for  arresting  them.  They 
are  very  generally  called  "commercial"  or  "financial 
crises ;  "  but,  as  all  industries  conspire  in  some  degree 
to  bring  them  about  and  all  suffer  from  them,  I  prefer  the 
more  comprehensive  term  of  "  industrial." 

2.  The  first  thing,  then,  is  to  define  accurately  and 
philosophically  what  an  industrial  crisis  is.     We  know  the 


252  CURRENCY. 

meaning  assigned  to  crises  in  diseases  of  die  body  or  of 
the  mind.  It  then  means  that  the  patient  has  reached  a 
point  in  his  malady  when  he  will  recover  or  die ;  or,  in 
case  of  mental  disorder,  where  the  mind  is  restored  to 
a  healthy  condition,  or  is  overthrown  and  dementia  sets  in 
So  far,  then,  as  a  comparison  can  be  made  between  the 
bodily  and  mental  diseases  and  the  maladies  of  society, 
we  may  define  a  crisis  in  the  latter  to  be,  when  a  long- 
continued  condition  of  things,  subversive  of  the  laws  of 
nature,  reaches  a  point  when  these  laws  intervene  and 
assert  their  ascendency.  Industrial  pursuits  do  not,  like 
the  body,  die  ;  but  they  become  paralyzed,  and  for  a  time 
weakened  and  demoralized.  In  some  countries,  such  as 
Great  Britain,  the  United  States,  Canada,  and  some  of  the 
German  States,  they  occur  more  frequently,  last  longer, 
and  are  more  destructive  than  in  others,  such  as  the 
"Latin  Union"  of  countries,  comprising  France,  Switzer- 
land, Italy,  and  Belgium.  Perhaps  here  we  may  find  a 
clew  to  their  most  stimulating  causes  and  aggravating 
characteristics. 

3.  Some  economic  writers,  and  the  public  very  gen- 
erally, impute  their  cause  to  what  is  "unreasoning  panic" 
among  commercial  men  and  managers  of  corporations. 
Thus,  Professor  Bonamy  Price,  in  addressing  the  Cham- 
ber of  Commerce  of  New  York,  in  the  autumn  of  1874, 
selected  the  crisis  of  1866,  in  Great  Britain,  as  an  example. 
He  was  speaking  of  crises  in  general  as  a  subject.  He 
said,  — 

"  The  cause  of  this  crisis  was  simply  alarm.  Simply  that  those 
vast  bodies  of  people  who  had  intrusted  funds  to  this  institution" 
(the  London  and  Westminster  Bank)  "got  into  what  may  be  called 
a  panic,  to  use  a  common  word.  In  that  state  of  wild  alarm,  all 
rushed  for  their  money,  every  man  catching  the  contagion,  which 
became  more  catching  because  it  was  unreasonable." 

The  Professor  then  went  on  to  show  what  a  bank  was, 


INDUSTRIAL    CRISES. THEIR    CAUSES   AND    EFFECTS.    253 

what  it  did,  and  finally  reached  the,  no  doubt,  correct 
conclusion,  that  crises  always  came  forth  from  "  the  re- 
gions of  the  banks,"  to  use  his  own  words. 

4.  But  to  stop  here,  and  say  panics  produce  crises, 
would  be  a  complete  begging  of  the  question.  It  would 
be  more  correct  to  say  that  crises  produce  panics.  But 
that  explains  nothing.  I  have  defined  a  commercial  panic 
to  be  the  culmination  of  a  long-continued  violation,  on 
the  part  of  the  industrial  members  of  a  community,  of  the 
natural  laws  of  industry  itself,  and  crisis  as  the  result. 
We  must,  then,  set  about  finding  out  wherein  society  has 
done  violence  to,  or  deviated  from  the  paths  prescribed 
by,  the  laws  of  industry,  and  thus  subjected  itself  to  the 
inevitable  penalties  of  prostration,  and  injury  to  public 
and  private  interests.  It  is  clear  that  something  must 
have  happened,  —  some  condition  of  things,  of  an  abnor- 
mal character,  must  have  previously  existed  to  superin- 
duce the  panic.  There  must  have  been  a  predisposing 
cause.  Panic  is  only  an  effect.  We  must  look  farther 
back.  We  must  examine  the  methods  of  industry,  and 
especially  that  "  region  "  of  it  forming  the  domain  of 
banks,  where  Professor  Price  correctly  located  the  origin 
of  crises,  and  see  what  we  shall  find  there  bearing  on  the 
case.  A  large  number  of  the  diseases  "  which  flesh  is  heir 
to "  are  imputed,  and  no  doubt  correctly,  to  causes  over 
which  most  people  have  more  or  less  power  or  control. 
A  certain  condition  of  the  body,  the  doctors  tell  us,  "pre- 
disposes to  disease."  The  cholera  comes  along  occasion- 
ally ;  and  those  whose  habits  and  bodily  conditions  have 
been  irregular,  or  not  properly  cared  for,  are  said  to  be 
"  predisposed "  for  taking  the  malady.  Now,  this  is 
exactly  what  we  want  to  find  out  in  respect  to  crises.  If 
they  "  originate  in  the  region  of  banks,"  we  must  see  to 
it  that  the  "little  foxes"  concealed  in  those  regions  are 
unearthed  and  made  to  show  themselves. 


254  CURRENCY. 

5.  But  though  industrial  crises  issue  forth  from  the 
region  of  the  banks,  like  the  evils  from  Pandora's  box, 
and  carry  destruction  and  desolation  with  them,  we  must 
inquire  into  more  remote  influences  :  we  must  ascertain 
how  banks,  which  are  only  instruments  of  industry,  are 
enabled  to  so  interfere  with  and  derange  the  natural  order 
of  things  in  society,  as  to  bring  about  distrust  and  loss 
of  confidence  among  "vast  bodies  of  people."  Panics 
do  not  come  without  cause  :  and  there  is,  notwithstanding 
Professor  Price's  dictum,  generally,  if  not  always,  some 
good  reason  for  them ;  and  we  must  go  beyond  the  banks 
in  search  of  it.  If  we  only  just  examine  how  trading 
power,  or  what  is  generally  called  floating  capital,  is  cre- 
ated, and  made  available  in  conducting  the  industries 
of  a  country,  we  shall  reach  a  point  from  which  we  can 
reason  with  some  degree  of  accuracy.  The  main  object 
I  have  had  in  view  in  writing  this  work  has  been  to  elimi- 
nate fundamental  errors  from  economic  principles  and 
practices ;  and  not  to  be  able  to  point  out,  with  some 
degree  of  precision,  the  causes  and  consequences  of 
crises,  would  be  a  tacit  admission  of  failure.  I  must, 
therefore,  appeal  to  what  I  have  laid  down  as  self-evident 
or  demonstrated,  for  what  we  are  in  search  of;  that  is, 
the  remote  causes  of  crises,  and  point  out  wherein  busi- 
ness men  and  banks  violate  natural  laws. 

6.  Let  us  refer  once  more  to  postulate  35,  which  lays 
down  the  proposition  that  the  bulk  of  trading  power,  or 
trading  capital,  dealt  in,  in  the  loan,  improperly  called 
the  money  market,  results  from  the  discount  by  banks  of 
bills  given  for  goods.  It  has  been  ascertained  in  London, 
that  only  three  per  cent  of  the  receipts  and  disbursements 
of  banks  consists  of  money,  of  which  but  the  half  of  one 
per  cent  is  metallic  money.  The  other  ninety-seven  per 
cent,  then,  consists  of  something  else  than  money.  A  part 
of  it  is  what  may  be  called  cash  capital,  or  the  savings  of 


INDUSTRIAL    CRISES. THEIR    CAUSES   AND    EFFECTS.     255 

industry,  —  the  surplus  of  income  over  outgo,  —  or  net 
profit.  This  is  mostly  held  by  bankers  ;  and  monetary 
science  would  be  advanced,  if  a  few  bankers  in  London 
and  New  York,  or  elsewhere,  would  analyze  their  business 
for  a  year  or  so.  and  ascertain  how  much  of  their  deposits 
are  thus  made  up,  and  how  much  of  discounts  placed 
to  the  credit  of  customers.  We  should  then  know  very 
accurately  how  to  trace  "  inflation."  I  have  estimated 
that  four-fifths  of  the  capital,  or  trading  power,  loaned 
by  banks,  is  derived  from  bills  and  other  securities,  and 
devices  for  the  transferrence  of  debts  and  credits,  growing 
out  of  the  sales  of  goods  in  course  of  preparation  and 
distribution,  from  the  hands  of  laborers  to  those  of  con- 
sumers. 

7.  Bankers  use  the  balances  of  customers  ;  but  it  is  evi- 
dent that  such  balances  as  are  the  results  of  saving,  or 
are  not  the  proceeds  of  discounted  bills,  which  they  also 
trade  on,  are  not  susceptible  of  expansion,  except  by  the 
addition  of  the  profits  of  new  investments.  It  will  there- 
fore follow,  that  the  field  of  inquiry  is  narrowed  down  to 
one  or  two  classes  of  customers ;  namely,  men  engaged 
in  active  production  and  distribution  of  commodities,  and 
speculators.  In  order  to  make  the  subject  clear  and 
demonstrated,  we  must  trace  the  operations  of  a  commu- 
nity through  a  cycle  of  years  embracing  a  crisis,  which  I 
shall  treat  as  a  chronic  industrial  malady,  and  not  as  a 
mere  momentary  occurrence.  We  will  start  with  what 
may  be  called  a  normal  state  of  things,  or,  after  labor  and 
production  have  recovered  from  long  depression  resulting 
from  a  crisis.  Laborers,  producers,  manufacturers,  and 
distributors  (the  latter  class  includes  bankers  and  mer- 
chants) are  working  together  on  sound  economic  princi- 
ples (except  so  far  as  legal  restrictions,  such  as  protection, 
and  erroneous  dogmas  about  bullion  and  foreign  trade 
interfere).     "The  outlook  of  the  future,"  as  it  is  said,  is 


256  CURRENCY. 

favorable.  There  are  no  commercial  or  financial  clouds 
visible,  and  people  generally  set  to  work.  Everybody 
"  makes  haste  to  grow  rich."  Goods  are  cheap,  and  so 
is  labor ;  but  everybody  is  busy.  Men  willing  to  work 
can  find  employment.  There  is  an  equilibrium  between 
supply  and  demand.  This  equation  is  indicative  of  a 
healthy  condition  in  a  country.  Goods  are  bought  and 
consumed  as  fast  as  produced.  Bank  dividends  which 
have  ruled  low  for  several  years  begin  "  to  look  up." 
Bank  stocks  rise  ;  and  new  banks  are,  in  consequence, 
formed,  and  old  ones  grow  careless  about  the  bills  that 
come  to  them.  They  have  no  means  but  customers' 
respectability  whereby  to  determine  whether  a  bill  is  the 
result  of  a  sale  of  goods,  or  of  a  resale  for  speculation. 
Prices  of  goods  necessarily  answer  to  the  rise  in  stocks  of 
banks  on  an  increased  demand.  When  people  are  well 
off  and  "  making  money,"  they  consume  more.  With 
rising  prices,  speculation  sets  in.  Everybody  wants  "  to 
take  a  turn  out  of  the  market."  Each  new  purchaser 
gives  his  bill ;  and  each  seller  takes  his  bill  to  the  bank, 
and  has  it  turned  into  trading  power.  The  same  goods 
are  "discounted"  over  and  over  again.  The  disease  of 
which  I  am  treating  "  grows  on  what  it  feeds  on." 

8.  The  number  of  banks,  especially  in  the  United 
States,  where  there  is  a  standing  bonus  of  eighty  or  ninety 
per  cent  of  paper  money  offering  for  capital  to  embark  in 
that  business,  increases  ;  and  all  banks  of  issue  vie  with 
each  other  in  keeping  out  as  large  an  amount  of  "  circu- 
lation "  as  practicable.  The  increase  of  the  volume  of 
money  adds  to  the  inflation  of  goods,  and  labor  and 
production  are  greatly  stimulated  and  greatly  increased. 
Everybody  fancies  he  is  growing  rich,  and  enlarges  the 
sphere  of  his  operations.  The  importer  of  foreign  goods, 
as  well  as  the  maker  of  domestic  goods,  exerts  himself  to 
the  utmost ;  and  the  demand  for  labor  raises  the  price 


INDUSTRIAL   CRISES. — THEIR   CAUSES   AND   EFFECTS.    257 

of  wages.  Blasting-furnaces,  rolling-mills,  car-builders, 
railway-projectors,  cotton-growers,  speculators,  and  man- 
ufacturers, and  so  of  workers,  producers,  and  manufac- 
turers of  woollen  and  nearly  all  the  great  "  staples,"  in- 
cluding "  breadstuffs,"  work  "  with  a  will,"  and  of  course 
their  products  increase  in  demand,  both  for  consumption 
and  speculation.  Bills  are  greatly  multiplied  in  num- 
ber, and  are  increased  in  amount ;  and  the  banks  "  dis- 
count "  (to  use  an  expression  of  an  eminent  British  econ- 
omist) "  mightily."  ' 

9.  This  "  fool's  paradise  "  goes  on  generally  for  some 
years,  say  four  or  five,  after  the  commencement  of  the 
"good  times"  when  supply  and  demand  were  "at  par" 
with  each  other.  Excessive  demand  for  consumption  is 
accompanied  by  excessive  demand  for  speculation.  The 
two  kinds  have  gone  together;  and  the  banks  have 
promptly  turned  the  trading  power  of  goods  into  capital, 
to  sustain  the  inflation  of  values.  These  institutions,  now, 
acting  on  the  wise  advice  of  the  eminent  banker,  Nicho- 
las Biddle,  already  quoted  in  Chap.  XXIV.,  are  the  first 
to  take  alarm.  They  first  catch  the  panic,  and  promptly 
curtail  their  discounts.  Is  this  "unreasoning  panic  "?  or 
is  it  the  return  of  reason  and  sober  judgment  after  a 
period  of  partial  insanity  ?  They  only  think  now  of  them- 
selves and  of  the  moment.  The  first  thing  the  banks 
do,  and  which,  if  it  does  not  precipitate  the  panic,  cer- 
tainly intensifies  it,  is  to  force  their  customers  to  sell  their 
goods  at  a  loss  ;  and  thus,  in  an  effort  to  save  themselves, 
there  is  an  indiscriminate  slaughter  of  traders.  This 
causes  what  Mr.  Biddle  points  out,  "the  return  of  the 
notes  in  circulation,  or  their  equivalent,"  by  those  who 
owe  them ;  and  the  banks,  looking  only  to  their  own 
immediate  necessities,  have  not  stopped  to  ascertain  who 

1  Bonamy  Price  on  the  error  of  the  Bank  of  England  in  curtailing  discounts 
in  times  of  crises. 


258  CURRENCY. 

are  sound  and  judicious  traders,  or  who  are  mere  specu- 
lators for  a  "turn  in  the  market."  Thus  they,  too,  must 
suffer  from  their  own  acts. 

10.  We  have  now  reached  the  point  in  the  industrial 
cycle  when  "great  bodies  of  people"  who  have  de- 
posits in  banks  catch  the  contagion,  and  those  who  have 
bills  maturing  become  distracted  about  the  wherewith  to 
meet  them.  They  all  rush  to  their  bank  to  draw  their 
balances  in  cash ;  but  the  banks  owe  three,  four,  or  five 
times  the  amount  of  cash  in  hand,  and  have  no  alterna- 
tive but  to  stop  specie  payments.  This,  of  course,  stops 
the  "  run  "  on  the  banks  ;  but  it  does  not  help  the  traders 
materially.  The  Bank  of  England  has  played  that  role 
three  times  since  its  present  organization  in  1844  :  viz., 
in  1847,  1857,  and  1866;  and  the  banks  of  the  United 
States  as  often.  Thus  it  appears  that  the  banks  first  lead 
their  customers  "  into  temptation,"  and  then  "deliver" 
them  over  to  "  evil."  They  reverse  the  Lord's  prayer. 
The  effect  of  these  causes  leading  to  panics,  and  followed 
by  what  I  have  termed  chronic  crises,  will  be  more  fully 
stated  in  the  next  chapter.  Here  we  may  pause  to  inquire 
what  laws  of  industry  have  been  violated  to  bring  about 
such  a  revulsion?  who  are  the  criminals?  and  are  they 
the  results  of  bad  methods  supported  by  bad  laws  ?  But, 
before  answering  these  pregnant  questions,  I  will,  in  the 
next  chapter,  illustrate  by  examples  from  history  the  per- 
tinency of  the  foregoing  description  of  a  part  of  an  indus- 
trial cycle. 

1 1 .  Enough  has  now  been  said  to  show,  beyond  dis- 
pute, that  the  panic  of  1866,  like  all  others,  followed  by 
a  collapse  of  credit,  or  a  crisis  in  industrial  affairs,  was 
not  the  cause,  but  the  effect,  of  an  unsound  and  long- 
existing  condition  in  most  if  not  all  kinds  of  industrial 
workers  engaged  in  the  growth,  production,  manufacture, 
and  distribution  of  goods.     The  motive   power,  so   to 


INDUSTRIAL   CRISES. — THEIR   CAUSES   AND    EFFECTS.    259 

speak,  which  sets  the  wheels  of  the  industrial  machine 
in  motion,  is  the  desire  of  the  members  of  the  commu- 
nity to  benefit  themselves,  or  perhaps,  strictly  speaking, 
the  necessity  that  mankind  is  under  to  produce  food, 
clothing,  and  dwellings  in  the  first  instance,  and  then  to 
procure  luxuries,  and  lay  up  something  for  old  age  and 
for  their  offspring.  If  this  end  could  be  accomplished 
through  natural  processes,  and  be  strictly  held  to  the 
action  of  natural  laws,  there  could  be  no  such  things  as 
crises.  We  have  seen  that  artificial  methods  form  a  large 
part  of  the  causes  leading  to  the  point  in  the  cycle  of 
years  when  distrust,  and  finally  entire  loss  of  confidence, 
take  place  among  the  members  of  a  community  in  each 
other.  It  is  not,  therefore,  "  unreasoning  panic "  that 
precipitates  the  break-down  of  credit,  but  the  too  sudden 
return  to  reason  on  the  part  of  the  whole  industrial  com- 
munity. The  failure  of  one  or  two  hitherto  trusted 
commercial  houses  fires  the  magazine  or  pricks  the 
bubble. 

12.  In  considering  the  great  influence  of  the  Bank  of 
England  on  public  financial  opinion,  and  its  pernicious 
policy  of  first  leading  on  to  inflation  by  countenancing 
an  artificially  low  rate  of  interest,  and,  when  symptoms 
of  unsound  trade  have  set  in,  rapidly  "  running  up  the 
rate,"  I  pointed  out  the  fact  that  the  natural  result  of  such 
policy  was  to  sow  the  seeds  of  the  disease,  and  then  pre- 
cipitate a  crisis.  The  directors  have  taken  the  trouble 
to  deny  the  correctness  of  this  charge  made  against 
them.  But  they  might  as  well  deny  that  they  are  re- 
sponsible for  changing  the  rate  at  all.  Mr.  Seyd,  in  his 
work  quoted  in  one  of  those  chapters  on  the  bank,  has 
pointed  out  that  these  changes  of  the  "rate,"  from  two  to 
as  high  as  six,  eight,  or  ten  per  cent,  have  occurred  over  a 
period  of  years  about  eight  times  to  a  similar  change  on 
the  part  of  the  Bank  of  France  once.      Hence  I  have 


260  CURRENCY. 

some  reason  to  assert  that  the  Bank  of  England  is  the 
head  and  front  of  crises  in  Great  Britain.  She  has  well 
earned  the  epithet  of  "  panic-maker."  I  have  also  shown 
that  this  mischievous  policy  is  the  result  of  having  all  its 
own  capital  invested  in  government  securities,  which  it 
ought  to  hold  in  cash  as  a  margin  of  security.  It  is  idle 
nonsense  to  talk  of  the  British  monetary  system  being 
sound  and  scientific,  while  this  policy  is  pursued. 


CHAPTER  XXIX. 

INDUSTRIAL   CRISES   CONTINUED. — THEIR   EFFECTS  AND 
REMEDIES. 

i.  In  my  last  chapter  I  defined  industrial  crises,  and 
traced  their  causes  back  to  original  principles  having  their 
"seeds  and  weak  beginnings"  in  motives  of  gain.  I 
would  here  remark,  that  I  have  accepted  the  common 
practice  of  using  the  term  crisis  as  a  continuing  condi- 
tion of  derangement  and  depression  in  the  industries  of 
a  country  succeeding  a  "  panic."  Strictly  speaking,  the 
term  is  one  defining  a  turning-point,  and  momentary  as 
to  time.  But,  by  general  consent  and  practice,  it  is  used 
to  define  the  period  of  depression  until  a  return  to  a 
healthy  condition  of  industry.  It  will  also  be  seen  that 
I  am  not  writing  a  history  of  crises,  which  would  of  itself 
make  a  volume,  and  one  which  ought  to  be  written. 

2.  I  propose  to  describe  one  or  two  to  illustrate  more 
particularly  how  they  come  about,  in  order  to  see  if  we 
can  get  at  a  scientific  remedy.  Like  skilled  physicians, 
economic  writers  must  first  make  up  a  diagnosis  of  indus- 
trial and  social  maladies,  and  prescribe  such  remedies  as 
seem  best  calculated  to  mitigate  or  wholly  cure  the  evils 
in  question. 


INDUSTRIAL  CRISES. — THEIR   EFFECTS  AND   REMEDIES.    26 1 

3.  Professor  Price  truly  said,  "  the  origins  of  crises  are 
somehow  connected  with  banks."  Mr.  E.  G.  Spaulding, 
formerly  a  member  of  Congress,  and  father  of  the  "  green- 
back" currency  which  President  Grant  once  thought  "the 
best  the  world  ever  saw,"  shall  testify  as  to  the  causes  of 
the  crises  of  1837  and  1857.  In  his  "Centennial  Ad- 
dress" to  the  Bankers'  Association  in  1876,  entitled 
"  One  Hundred  Years  of  Banking  in  America,"  Mr. 
Spaulding  says,  speaking  of  the  banks  of  the  United  States, 
"On  Jan.  1,  1837,  the  bank  circulation  of  the  country, 
according  to  the  treasury  reports,  was  #149,000,000.  By 
Jan.  1,  1843,  it  was  reduced  to  #58,000,000:  a  ruinous 
fall  of  prices  ensued,  and  wide-spread  distress  and  many 
failures  was  the  consequence."  Going  back,  Mr.  Spaul- 
ding tells  us,  "in  the  seven  years,  from  1830  to  1837,  no 
less  than  three  hundred  and  four  new  banks  sprung  into 
existence,  with  a  nominal  capital  of  #145,000,000,  and 
#59,000,000  of  circulation.  .  .  .  The  loans  increased  from 
#200,000,000  to  #525,000,000." 

4.  Those  who  have  carefully  read  the  last  chapter  will 
see,  that  such  an  increase  of  bank  loans  could  by  no  possi- 
bility have  taken  place,  except  by  the  increase  of  bills. 
This  increase  of  bills  could  by  no  possibility  have  occurred 
throughout  a  whole  country,  except  by  resales  of  goods 
in  a  rising  market  for  speculative  purposes.  In  fact,  the 
goods  must  have  come  to  be,  in  their  entire  aggregate, 
represented  not  less  than  two  or  three  times  in  the  loan 
market.  As  bills  are  averaged  at  two  months,  they  would 
aggregate  in  the  discount  ledgers  of  the  banks  for  the  first 
year  (1830),  #200,000,000;  and  in  the  last  year  (1837), 
#525,000,000.  Thus,  supposing  these  bills  to  have  been 
all  founded  on  sales  and  resales  of  goods,  we  find  they 
have  increased,  in  the  seven  years,  considerably  over  two 
and  a  half  fold.  Such  an  increase  of  circulation  would 
^ve  been  impossible,  but  for  the  large  increase  of  paper 


262  CURRENCY. 

money.  This  will  give  some  idea  of  the  enormous  amount 
of  inflation  effected  wholly  through  the  banks  of  issue  and 
discount  of  that  period. 

5 .  Still  speaking  of  the  same  crisis,  Mr.  Spaulding  says, 
referring  to  the  outbreak  of  it  in  1837, — 

"  Each  day  developed  some  new  case  of  insolvency  on  the  part 
of  the  banks  and  individuals.  Finally  the  distress  extended  to  all 
classes  of  business  ;  credit  was  destroyed;  the  panic  became  gen- 
eral, when,  in  May,  1837,  all  of  the  banks  of  the  country  suspended 
specie  payments." 

6.  He  next  comes  down  to  the  great  crisis  of  1857,  of 
which  he  says,  — 

"  This  crisis,  like  the  revulsion  of  1837,  was  caused  by  too  great 
an  expansion  of  credit.  Debts  in  all  forms  became  excessive.  The 
railway  system  had  been  largely  extended  on  borrowed  capital," 
etc. 

These  extracts  from  Mr.  Spaulding's  account  of  Ameri- 
can banking  will  serve  the  purpose  of  illustration ;  and  I 
shall  only  briefly  refer  to  British  experience,  where  equal 
disasters  were  brought  on  by  exactly  similar  causes.  Mr. 
Spaulding's  address  is  very  valuable  evidence  of  the  im- 
policy of  tolerating  banks  of  issue,  or  the  issue  of  bank 
notes  at  all,  in  any  form  or  manner.  It  would  have  been 
more  appropriate  to  have  called  his  address,  "  A  History 
of  the  Disasters  arising  from  the  Issue  and  Use  of  Bank 
Notes  in  America  for  One  Hundred  Years,"  or  it  might 
have  been  entitled,  "  One  Hundred  Years  of  Banking  in 
America,  demonstrating  the  Erroneous  Policy  of  Delegat- 
ing to  Banks  the  Prerogative  of  the  Nation  to  Issue  Paper 
Money  for  Private  Gain."  The  last  title  would  have  been 
very  appropriate,  as  well  as  very  impressive. 

7.  I  will  only  add,  in  reference  to  the  greatest  and  most 
disastrous  of  all  crises  through  which  American  industry 
has  ever  passed, — namely,  that  of  September,  1873,  from 
which  the  country  has  only  just  emerged  after  five  years 


INDUSTRIAL    CRISES. THEIR    EFFECTS   AND    REMEDIES.    263 

of  severe  depression,  —  that  it  was  clue  to  the  same  de- 
scription of  causes  as  those  stated  by  Mr.  Spaulding  as 
having  superinduced  the  crises  of  1837  and  1857.  It 
may  be  observed,  that,  although  the  paper  currency  of 
the  United  States  is  now  at  par  of  gold,  there  exists  an 
immense  inflation  of  credit,  as  shown  in  Chap.  XXIV. 
Nevertheless,  the  wages  of  labor,  and  the  market  value 
of  goods,  are  still  low.1  But  let  not  those  who  are  clamor- 
ing for  "  more  money  "  suppose  that  this  condition  will 
long  continue.  The  business  and  wealth  of  the  country 
have  quadrupled  since  1840  ;  and  we  must,  therefore,  take 
that  into  the  account  in  considering  the  crisis  of  1873. 

8.  The  experiences  in  Great  Britain  in  the  matter  of 
crises,  both  before  and  since  the  re-organization  of  the 
Bank  of  England  in  1844,  have  been  similar  to  those  in 
America,  and  are  ably  described  by  numerous  economic 
writers.  That  of  1825  may  be  taken  as  a  fair  sample. 
Mr.  Courtney,  M.P.,  and  Mr.  Henry  Dunning  McLeod, 
have  given  short  but  graphic  descriptions  of  this  crisis 
which  set  in  in  December  of  that  year.  In  the  latter  part 
of  the  year  1824,  there  prevailed  a  large  amount  of  infla- 
tion in  paper  money  and  bank  discounts.  Labor  and 
goods  had  been  steadily  rising  in  market  value  from  the 
bank  resumption  in  1820,  and  were  already  excessive. 
This  condition,  I  have  shown,  begets  numerous  bills, 
which  the  banks  freely  turned  into  trading  power  by  dis- 
counting. Capital,  of  course,  was  abundant  and  cheap. 
Just  at  this  time  the  Government  recognized  the  inde- 
pendence of  the  Spanish-American  colonies,  and  a  new 
field  of  speculation  suddenly  spread  itself  before  the  peo- 

1  This  was  written  in  March,  1879.  It  is  now  March,  1880;  and  the  progress 
af  the  cycle  has  made  rapid  advance.  Wages  have  everywhere  risen.  Prices  have 
gone  up  in  even  a  greater  ratio,  and  men  are  everywhere  striking  for  still  higher 
jrages.  How  long  will  it  be  before  the  inevitable  crash  will  come?  Who  will  answer 
his  question?  Paper  money  —  bank  notes  wholly  —  has  increased  $40,000,000  in 
a  year,  and  goes  on  increasing. 


264  CURRENCY. 

pie.  A  large  number  of  new  banks  of  issue  were  started, 
each  with  from  four  to  a  dozen  branches  which  acted  as  if 
they  were  independent  banks.  The  shares  of  these  new 
banks  were  nominally  jQioo,  and,  with  only  ^5  paid,  often 
sold  for  ,£40,  so  anxious  were  the  people  to  rush  into  bank- 
ing. The  volume  of  paper  money  was  raised  a  hundred 
and  twenty  per  cent  in  a  little  over  a  year.  The  Bank  of 
England  competed  with  the  mushroom  banks  for  its  share 
of  the  circulation  and  discount  business,  which  was  swelled 
ratably  with  the  volume  of  notes.  This  state  of  things 
went  on  increasing  in  intensity  for  a  year.  We  are  told, 
"  Princes  of  the  blood,  nobles,  members  of  Parliament, 
bishops,  clergymen,  lawyers,  doctors,  merchants,  clerks, 
and  mechanics  joined  in  the  universal  saturnalia  of  spec- 
ulation." Such  a  scramble  to  get  rich  existed  once  in 
France,  over  a  hundred  years  before,  in  the  palmy  days 
of  John  Law.  In  December,  1825,  the  inevitable  crash 
came ;  and  nearly  everybody  was  pauperized.  Maiden 
spinsters,  governesses,  clergymen,  lawyers,  doctors,  and 
the  thousands  of  usually  prudent  people,  who  had  ven- 
tured all  they  had  in  bank  stocks,  and  South  American 
and  Mexican  schemes,  lost  all ;  and  a  universal  cry  of 
distress  went  up  throughout  the  land.  But  though  the 
losses  of  this  period,  directly  traceable  to  the  banks  of 
issue  and  discount,  amounted  to  or  were  estimated  at 
^£150,000,000  sterling,  the  country  went  through  another 
almost  similar  experience  during  the  next  ten  years ;  and 
the  crisis  of  1837  was  the  result.  New  losses  and  fresh 
distress  were  thus  superinduced ;  and  a  period  of  six  or 
seven  years  of  depression  led  to  the  passage,  in  1844,  of 
Sir  Robert  Peel's  Bank  Act,  limiting  the  issue  of  bank 
notes  to  those  then  in  circulation,  and  abolishing  all  other 
than  those  of  the  Bank  of  England  within  fifty  miles  of 
London.  But  this  did  not  cure  the  evil.  Three  more 
crises   have   since   occurred;   viz.,  in   1847,   1857,  and 


INDUSTRIAL   CRISES. — THEIR   EFFECTS   AND   REMEDIES.    265 

1866,  to  which  the  one  of  the  current  year,  1879,  may 
be  added. 

9.  Here  we  have  presented,  in  a  brief  but  authentic 
form,  evidences  on  an  immense  scale  of  the  correctness 
of  the  principles  I  have  stated.  We  have  irresistible  tes- 
timony of  the  logical  formula  of  "  like  causes  produce 
like  effects."  We  find  logical  reasoning  and  practical 
facts  conspiring  to  show  that  the  place  where  crises  are 
"hatched"  and  panics  are  started  is  "in  the  regions 
of  banks  "  of  issue  and  discount.  The  excessive  issue 
of  notes  renders  possible  the  excessive  discount  of  bills 
founded  on  sales  or  resales  of  goods,  and  must,  therefore, 
be  held  to  be  the  incipient  causes.  The  first  stimulate 
the  latter.  An  increase  in  the  volume  of  currency  and 
discounts  reduces  the  market  value  of  money  and  trading 
power,  and  exactly,  and  pari  passu  therewith,  a  rise  in 
the  market  value  of  labor  and  goods.  Convertibility,  it 
will  be  seen,  is  no  remedy  for  the  evil.  The  remedy,  so 
far  as  currency  is  concerned,  is  to  be  found  in  the  plan 
I  have  laid  down  in  this  work,  and  more  particularly  in 
Chaps.  XXIV.  and  XXVI.,  for  the  issue  of  money  of  all 
kinds,  and  in  the  draft  bill  for  an  Act  of  Congress  fol- 
lowing. 

10.  This  exposition  of  principles  will  not  be  complete 
without  pointing  out  how  so  much  evil  results  to  industry 
by  crises.  To  reach  a  clear  logical  conclusion,  we  must 
consider  the  basis  on  which  a  large  proportion  of  indus- 
try is  conducted.  It  falls  to  but  few  to  start  in  life  with 
what  is  called  "  cash  capital."  The  farmer  either  rents 
his  farm,  or  buys  it  by  paying  down  a  certain  amount. 
The  merchant,  with  rare  exceptions,  is  possessed  of  no 
more  than  ten  to  twenty-five  per  cent  of  cash  capital, 
and  not  unfrequently  begins  wholly  on  credit.  The  banks 
do  business  on  a  very  moderate  margin.  They  trade 
largely  on  "  other  folks'  capital  "  deposited  with  them  for 


266  CURRENCY. 

convenience  and  safe  keeping,  for  more  or  less  of  which 
they  pay  interest.  The  Bank  of  England  and  the  national 
banks  of  America  invest  their  capital,  in  part  or  in  whole, 
in  public  securities,  and  rely  mostly  or  wholly  on  bor- 
rowed capital  to  trade  on.  The  specie  they  hold  is  merely 
borrowed.  It  belongs  to  depositors.  The  Bank  of  Eng- 
land, as  I  have  shown,  holds  about  one  pound  in  thirty 
of  specie  against  the  latter  amount  of  instant  liabilities, 
and  maintains  itself  by  its  prestige  and  great  facilities  for 
borrowing  out  of  the  cash  held  in  the  Issue  Department 
to  cover  notes.  Hence  the  intense  sensitiveness  of  the 
managers  in  respect  to  the  trade  in  bullion. 

1 1 .  This  is  the  normal  condition  of  these  great  and 
greatly  predominating  institutions  in  Great  Britain  and 
the  United  States.  Every  person  of  the  most  ordinary 
powers  of  ratiocination  must  now  perceive  how  these 
oft-recurring  heavy  depreciations  in  the  value  of  goods, 
lands,  etc.,  wipe  out,  as  with  a  sponge,  these  margins  on 
which  nearly  all  classes  conduct  their  industries.  There 
has  been  a  gradual  rise  in  prices,  and  a  corresponding 
increase  in  the  means  for  manufacturing  trading  capital 
through  a  period  of  some  years.  All  kinds  of  industrial 
business  have  responded  to  this  all-pervading  influence. 
Industry  has,  in  fact,  steadily  adapted  itself  or  yielded  to 
the  causes  stated.  Then  comes  the  period  in  the  cycle 
when  sober  reason  re-asserts  itself,  and  panic  is  the  re- 
sult. The  whole  system  topples  down ;  values  shrink, 
thirty,  forty,  fifty,  and  sometimes  more,  per  cent.  Those 
who  felt  strong  with  thirty  per  cent  margin,  now  find 
themselves  beggared.  The  banks  have  compelled  them 
to  sell  their  property  at  a  loss,  in  order  "  to  return  their 
notes  or  their  equivalents."  Many  banks  are  in  straits, 
and  large  numbers  fail. 

12.  We  have  now  examined  the  whole  period  of  an 
industrial  cycle  in  the  two  most  conspicuous  countries 


INDUSTRIAL   CRISES.  —  THEIR   EFFECTS   AND    REMEDIES.    267 

where  banks  of  issue  most  predominate.  We  find  these 
cycles  continually  recurring  in  greater  or  lesser  degrees 
of  similarity.  I  remarked,  in  passing,  in  paragraph  9, 
that  the  remedy,  so  far  as  paper  money  was  concerned, 
had  already  been  pointed  out  in  previous  chapters.  That 
remedy  can  only  be  found,  as  I  have  shown,  in  abolish- 
ing bank  notes  and  supplying  paper  money  by  the  state, 
through  a  department  wholly  separated  from  the  exigen- 
cies of  finance,  national  and  private,  and  selling  it,  pound 
for  pound,  dollar  for  dollar,  for  gold  or  silver  coin. 

13.  But  what  inferences  are  we  to  draw  from  the 
almost  entire  freedom  from  panics  and  crises  which  ex- 
ists in  France,  where  there  is  only  one  bank  of  issue, 
and  where  the  Bank  of  France  notes  are  sold  for  gold  ? 
This  bank,  unlike  the  Bank  of  England  and  the  two 
thousand  banks  of  issue  in  the  United  States,  has  not 
all,  or  nearly  all,  its  capital  derived  from  shares,  invested 
in  public  securities.  '  Unlike  the  Bank  of  England,  it  dis- 
counts commercial  paper  "  mightily."  It  is  not,  like  the 
British  bank,  a  dealer  to  a  preponderating  extent  in  for- 
eign and  railway  loans.  Mr.  Seyd  has  shown  this  in  his 
work  on  the  "  Error  of  the  Note  Issue  of  the  Bank  of 
England."  When  the  English  National  Bank  gets  into  a 
strait,  it  finds  all  its  share  capital,  and  half  of  other  folks' 
capital  which  it  trades  on,  invested  in  government  and 
other  securities,  including  railway  debentures  and  foreign 
government  stock,  which  have  fallen  in  market  value, 
and  cannot  be  sold  to  relieve  itself  without  a  heavy  loss. 
There  is  nothing,  then,  left  for  it  but  to  "  pray  to  Her- 
cules "  to  come  to  its  relief. 

14.  I  now  ask  British  and  American  statesmen  to  pon- 
der over  these  facts,  and  see  if  they  cannot  find  a  remedy 
in  the  suggestions  I  have  made,  and  in  assimilating  the 
banking  systems  to  a  condition  similar  to  that  which  has 
given  to  France  freedom  from  crises,  and  in  conformity 


268  CURRENCY. 

with  the  natural  laws  of  industry.  The  first  step  is,  un- 
questionably, to  get  rid  of  bank  notes.  Furthermore,  I 
say  emphatically,  if  banks  are  to  be  allowed  to  suspend 
payment  on  occasions  of  great  panics,  let  the  principle  be 
extended  to  all  classes,  temporarily.  This  is  what  the 
Bank  of  France  did  to  all  its  customers,  in  1872,  by  an 
Act  of  the  National  Assembly,  which  granted  an  extension 
of  time  for  payment  of  bills  {vide  chapter  on  Bank  of 
France).  Such  a  law  would  prevent  the  banks  destroy- 
ing their  customers  to  save  themselves,  and  would  serve 
to  stop  panic,  and  enable  prudent  men  to  liquidate  their 
own  indebtedness,  instead  of  being  forced  into  insolvency. 
But  I  predict,  that,  with  a  sound  monetary  system,  panics 
and  crises  will  cease,  as  in  France.  "  Like  causes  pro- 
duce like  effects."     Q.  E.  D. 


CHAPTER    XXX. 


INDUSTRIAL     CRISES     CONTINUED.  —  HOW    "  PROTECTION    TO 
DOMESTIC  INDUSTRY  "  COUNTERACTS  THE  NATURAL   ORDER 

OF     THINGS, FIRST     CAUSING     EXTREMELY     HIGH     PRICES 

AND  OVER-SUPPLY  ;    THEN,  BY  RE-ACTION,  EXTREMELY  LOW 
PRICES  :     THUS    SUPERINDUCING    AND    INTENSIFYING    CRISES. 

i.  A  simple  statement  and  analysis  of  the  protective 
system  will  serve  to  show  the  fundamental  error  on  which 
the  system  rests.  Its  object  is  to  build  up  or  enlarge  the 
scope  of  certain  classes  of  industries  by  the  imposition 
of  taxes  sufficiently  high  to  exclude,  to  an  adequate  de- 
gree, the  like  productions  of  foreign  countries.  The  public 
at  large,  who  are  the  consumers,  are  thus  compelled  to 
buy  the  goods  of  the  home  producers  and  manufacturers 
at  a  materially  enhanced  price.  The  immediate  result  is, 
not  merely  the  addition  of  the  amount  of  the  tax  to  the 


INDUSTRIAL   CRISES   CONTINUED.  269 

price  before  set  on  the  protected  goods,  but  also  a  profit 
on  the  duty  paid.  For  instance,  where  an  importing 
merchant  was  before  content  to  sell  for  twenty-five  per 
cent  profit,  and  a  protective  duty  of  forty  per  cent  is 
enforced  (and  the  conscience  of  the  protectionist  is  often 
not  satisfied  with  less  than  sixty,  eighty,  or  even  one 
hundred  per  cent),  he  adds  the  forty  per  cent,  and  a 
twenty-five  per  cent  profit  on  that,  making  the  whole  fifty 
per  cent ;  and  all  this  in  addition  to  the  cost  of  transport, 
insurance,  agency,  etc. 

2.  This  is  a  brief  but  true  statement  of  the  purpose 
and  desired  effect  of  protection.  Let  us  inquire  who  are 
benefited  and  who  are  injured  by  the  plan.  When  indus- 
trial pursuits  are  left  entirely  to  the  natural  laws,  or  to  the 
distribution  of  natural  causes  and  forces,  it  is  obvious  that 
a  just  equilibrium  will  be  maintained  by  the  action  of 
supply  and  demand.  If  one  country,  or  the  people  of  one 
country  (which  is  the  more  correct  way  of  expressing  it), 
purchase  the  productions  of  the  people  of  other  coun- 
tries, they  must  pay  for  them  with  the  productions  of  their 
own  labor,  or  with  articles  —  such,  for  instance,  as  gold 
and  silver  —  which  they  obtain  or  produce  by  such  labor  ; 
and,  as  stated  in  postulate  44,  "  all  trade  continually  tends 
to  balance  itself,  or  to  equilibrium."  Hence  it  logically 
follows,  that  all  interferences  with  this  natural  tendency 
to  equilibrium,  on  the  part  of  governments,  is  injurious 
to  the  general  interests,  just  to  the  extent  to  which  their 
power  and  influence  can  be  made  effective. 

3.  But  the  economist,  who  seeks  to  establish  true  prin- 
ciples, has  to  analyze  the  general  effect  of  these  artificial 
methods  of  building  up  home  industries.  Discarding 
entirely  from  view  the  higher  sense  of  eternal  justice  and 
fitness  of  things,  or  what  might  be  supposed  to  be  the 
sentiment  and  purpose  of  the  Creator  of  all  things,  in 
regard  to  the  whole  human  family,  we  shall  find  enough 


2  70  CURRENCY. 

in  the  demoralizing  effect  of  protection  on  the  people  who 
it  is  claimed  are  benefited  by  it,  to  utterly  overthrow  the 
theory  on  which  it  is  founded.  In  other  words,  the  prac- 
tical effects  at  home  demonstrate  the  fundamental  error 
of  the  system.  The  fact  is,  the  capital  and  the  labor  which 
are  thus  artificially  attracted  into  the  protected  industries, 
are  not,  to  any  material  extent,  drawn  from  foreign  coun- 
tries. Let  us,  then,  see  where  it  comes  from  in  the 
United  States.  No  one  will  pretend  to  assert  that  the 
capital  and  labor  employed  in  countries  like  France  and 
Germany,  where  protection  still  rules,  were  drawn  from 
Great  Britain,  Russia,  China,  or  the  United  States.  Why, 
then,  should  the  protectionists  of  America  claim  that 
such  has  been  the  case  in  respect  to  the  latter  country? 
It  is  absurd  to  claim  that  such  has  been  the  case.  Expe- 
rience, as  I  shall  clearly  demonstrate,  shows  that  both 
the  capital  and  the  labor  employed  under  the  hot-house 
system  of  establishing  manufactures  in  the  United  States, 
as  in  all  other  countries  where  the  system  still  lingers,  are 
diverted  or  attracted  from  other  home  callings  and  indus- 
tries into  those  which  the  State  seeks  to  build  up  by  impos- 
ing on  all  consumers  protective  duties  or  taxes.  It  is  a  tax 
on  all  for  the  advantage  of  a  few. 

4.  The  argument  set  up  by  protective  philosophers, 
that  in  time  protection  brings  about  such  an  amount  of 
home  competition  as  to  cheapen  the  protected  articles, 
and  make  them  more  abundant,  than  if  the  law  did  not 
offer  a  premium  for  the  diversion  to  them  of  capital  and 
labor,  is  a  mere  begging  of  the  question.  It  is  an  assump- 
tion which  overthrows  the  system  itself.  To  appeal  to  the 
facts,  let  us  take  the  leading  protected  industries  of  the 
United  States  as  examples.  These  consist  of  the  produc- 
tions and  manufactures  of  iron,  steel,  and  every  thing  con- 
nected with  the  construction  and  operation  of  railways, 
iron  ships,  and  cotton  and  woollen  goods.     The  manu- 


INDUSTRIAL   CRISES   CONTINUED.  271 

factures  in  question  existed  in  a  very  healthy  and  growing 
condition  prior  to  the  great  civil  war,  the  exigencies  of 
which  afforded  both  the  excuse  and  the  opportunity  to 
those  who  are  ever  ready  to  avail  themselves  of  such 
catastrophes  to  get  their  hands  into  other  people's  pock- 
ets, to  establish  the  present  vast  system  of  public  plunder. 
Congress  and  the  nation  became  demoralized  by  that  great 
struggle  ;  and  a  system  worse  than  that  of  Spain  in  the 
palmy  days  of  Ferdinand  and  Isabella,  from  which  that 
country  has  not  yet  recovered,  became  firmly  fixed  on  the 
United  States. 

5.  These  are  simple  historical  facts.  We  have  now  to 
trace  out  the  results.  It  may  fairly  be  claimed,  that  had 
"a  revenue  tariff"  been  established,  —  that  is,  a  tariff 
that  would  have  yielded  the  largest  amount  of  revenue, 
if  you  like,  —  instead  of  the  one  that  was  passed,  and 
remains  still  in  force  (the  proceeds  of  which,  so  far  as 
•'protection"  was  effected,  have  gone  into  the  pockets 
of  a  small  number  of' individuals  who  monopolized  those 
privileged  productions),  it  would  have  inured  to  the  na- 
tion, and  have  been  applied  in  liquidation  of  the  public 
debt  and  reduction  of  taxation.  It  is  not  claiming  too 
much  to  say,  that  such  a  revenue  tax  would  have  paid 
off  the  entire  debt  by  this  time ;  and  the  burden  would 
have  fallen  lighter  on  the  general  public  than  it  has 
during  the  fifteen  years  which  have  elapsed  since  the 
close  of  the  war.  In  making  this  very  obvious  claim,  it 
is  simply  saying  that  the  protective  system  has  benefited 
certain  limited  classes  of  individuals  who  embarked  and 
continue  in  these  industries,  say  to  the  aggregate  extent 
of  one  hundred  millions  a  year.  This  will  become  appar- 
ent when  we  analyze  the  effects  on  other  industries,  and 
will  hardly  be  denied  by  any. 

6.  Take  the  conspicuous  case  of  iron  and  steel  rails, 
on  which  a  duty  equal  to  about  $28  a  ton  was  imposed. 


2  72  CURRENCY. 

This,  together  with  the  cost  of  transport,  agencies,  and 
other  incidental  expenses,  raised  iron  rails  to  $80  and 
steel  |i2oa  ton  in  1872.  Engines,  cars,  and  other  rail- 
way supplies,  went  up  accordingly.  These  enormous  taxes 
built  up  a  limited  number  of  great  capitalists,  and  ruined 
thousands  and  thousands  who  invested  their  means  in 
providing  the  much-needed  highways  of  civilization.  The 
laborers  employed  in  these  stimulated  industries  were  not 
benefited.  They  were  drawn  from  other,  and  in  many 
instances  more  congenial,  occupations.  An  inflated  cur- 
rency, also,  tended  to  increase  all  prices,  as  measured  by 
it,  still  more  :  so  that,  after  all,  the  increase  in  the  wages 
of  labor  did  not  benefit  the  working  classes ;  as  the  cost 
of  their  living  rose  in  proportion.  This  is  always  the 
effect  of  a  protective  system.  By  drawing  both  labor  and 
capital  from  other  industries,  which  do  not  come  within 
the  category  of  protection,  the  prices  of  the  productions 
of  the  latter  sympathize  with  those  of  the  general  mass 
of  commodities,  and  rising  prices  engender  speculation  ; 
and  so  "  the  disease  grows  on  what  it  feeds  on,"  till  the 
inevitable  day  of  disaster  bursts  like  a  thunderbolt  on  the 
whole  community,  and  universal  crisis  sets  in.  Now,  had 
the  tax  on  foreign  rails  not  been  made  prohibitive,  but, 
say,  1 10  a  ton,  there  would  have  been  a  large  revenue 
therefrom,  and  the  price  of  rails  would  never  have  ruled 
higher  than  $60  for  iron  and  $90  for  steel  descriptions. 
Such  a  diminution  in  cost  would  have  greatly  increased 
the  consumption  ;  and  the  country  would  have  been  sup- 
plied with  thousands  of  miles  more  railways,  at  less  cost, 
than  it  now  possesses  ;  hundreds  of  millions  of  additional 
wealth  would  have  been  created  by  such  means ;  and  the 
increased  revenue  would  have  gone,  as  I  have  shown,  to 
the  liquidation  of  the  public  debt,  instead  of  into  the 
pockets  of  a  small  class  of  capitalists,  who  alone  have 
been  profited. 


INDUSTRIAL   CRISES   CONTINUED.  273 

7.  Looking  a  little  below  the  surface  of  things,  we  shall 
find  that  these  protected  industries,  prior  to  the  crisis  of 
1873,  drew  both  capital  and  labor  away  from  farming, — 
that  is,  from  the  production  of  cotton,  wheat,  corn,  and 
other  farm  products,  which  engage  three-fourths  of  the 
entire  population  of  the  United  States.  Farming  is  by 
far  the  most  important  industry  of  the  United  States, 
which  possesses  an  almost  boundless  extent  of  rich  and 
cheap  wild  lands.  The  products  of  agriculture  far  exceed 
in  value  all  others  put  together,  and  the  sop  of  protection 
held  out  to  the  farmers  is  wholly  a  delusion.  Canada  is 
the  only  competing  country;  and  the  market  price  of 
the  leading  farm  productions  of  both  countries  —  such  as 
wheat,  corn,  butter,  pork,  and  beef,  as  well  as  cotton  —  is 
determined  by  the  foreign  demand.  Therefore,  the  farm- 
ers of  the  United  States  are  humbugged  into  the  belief 
that  a  duty  of  thirty  or  forty  per  cent  on  most  of  those 
products  benefits  them  ;  when  in  fact  their  admission  into 
the  United  States  free  would  produce  no  appreciable 
effect  on  their  market  values,  because  the  surplus  of  both 
Canada  and  the  United  States  is  exported  to  transatlantic 
countries,  which  set  their  selling  prices  at  home.  But 
this  is  a  digression  from  the  purpose  of  this  chapter, 
which,  however,  I  could  not  resist  making. 

8.  To  return  to  the  argument.  The  effect  of  the  Amer- 
ican protective  system  has  been,  as  I  have  pointed  out, 
to  draw  labor  and  capital  from  agricultural  pursuits,  or 
which  would  have  gone  into  such  pursuits,  and  drive 
them,  by  means  of  the  bounty  offered  by  the  Govern- 
ment, into  the  classes  of  manufactures  I  have  mentioned. 
An  immense  stimulus  was  thus  given  to  all  the  manu- 
factures of  iron,  railway  supplies,  and  woollen  and  cotton 
goods.  Everybody  became  anxious  "  to  make  hay  while 
the  sun  shone,"  and  the  business  was  largely  "  overdone." 
The  wages  of  labor  rose  so  high  that  farmers  were  unable 


2  74  CURRENCY. 

to  compete  with  those  engaged  in  manufactures,  and  the 
surplus  of  their  productions  diminished  or  remained  sta- 
tionary ;  and  the  lines  of  steamships  had  to  be  reduced  in 
numbers  and  tonnage.  This  helped  to  maintain  the  price 
of  farm  products  at  home.  But  in  1873  this  condition 
of  things  rose  to  such  a  point  of  inflation  that  all  that 
was  needed  was  a  spark  to  set  off  the  combustible  mass. 
The  failure  of  the  banking  firm  of  Jay  Cook  &  Co.  sup- 
plied the  spark  of  fire,  and  precipitated  the  explosion, 
perhaps  by  a  few  months ;  for  it  was  inevitable. 

9.  It  will  now  be  seen  how  important  a  part  protection 
played  in  the  vast  system  of  American  industries,  thus 
suddenly  wrecked  in  September,  1873.  Hundreds  of  mil- 
lions of  capital  had  been  diverted  or  abstracted  from  in- 
vestments into  which  it  had  grown  up,  and  then  formed 
a  part  of  the  prior  industrial  system.  Though  agriculture 
had  been  depleted  of  a  portion  of  its  means  and  labor,  it 
was  for  a  time  sustained  by  the  enhanced  demand  for  its 
productions,  and  consequent  increase  in  price  ;  but,  when 
the  general  paralysis  came  on  the  country,  it,  too,  suffered 
severely.  As  it  was  the  last  to  feel  the  stimulus  of  the 
inflation  mania,  so  was  it  the  first  to  recover.  It  will  not 
be  disputed  that  the  class  of  industries  which  suffered 
most  severely  and  were  longest  depressed  by  the  crisis 
of  1873  was  essentially  that  which  had  been,  and  still  is, 
most  heavily  taxed  for  "protection  to  domestic  indus- 
try." The  demand  for  these  "protected"  articles  was 
greatly  diminished  by  the  panic ;  and  the  pressure  to 
sell,  to  meet  liabilities  to  banks  and  others,  caused  a 
heavy  fall  in  prices.  A  vast  army  of  laborers  were  turned 
loose,  without  employment,  and  were  compelled  to  beg, 
or  work  for  a  bare  subsistence.  The  country  was  over- 
run with  "tramps."  Farmers  were  able  once  more  to 
employ  labor  at  a  low  rate,  and  then  followed  a  yearly 
increase  in  the  quantity  of  all  kinds  of  farm  products. 


INDUSTRIAL   CRISES   CONTINUED.  275 

If  it  had  not  been  for  the  failure  of  crops  during  the  last 
two  years  in  several  European  countries,  "  breadstuffs " 
would  have  been  a  drug  in  the  American  market.  The 
abundance  in  America  came  most  opportunely  for  the 
needs  of  Europe. 

10.  Thus  it  appears  that  the  impediments  imposed  by 
governments  on  the  natural  order  of  the  industries  of  the 
people  continually  tend  to  disturb  those  industries,  and 
superinduce,  intensify,  and  prolong  industrial  crises.  Even 
if  we  were  to  admit  that  certain  great  industries  have 
been  fostered  to  the  extent  claimed  by  the  illogical  rea- 
soning of  the  protectionist,  if  reasoning  it  can  properly 
be  called,  the  destruction  of  capital  and  the  injury  to 
labor  must  far  exceed  those  doubtful  advantages.  A 
single  year  has  sufficed  (I  am  now  writing  in  March, 
1880)  to  tide  Great  Britain  over  the  "hard  times,"  caused 
partly  by  the  failure  of  two  harvests,  and  partly  by  over- 
production in  former  years. 

n.  I  have  said  nothing  of  over-consumption.  It 
must,  however,  be  taken  into  account.  "  Over-consump- 
tion "  relates  chiefly  to  capital,  but  in  a  lesser  degree  to 
goods.  It  is  when  large  amounts  of  capital  are  drawn 
from  productive  and  paying  business,  and  becomes  irre- 
trievably sunk  in  unproductive  undertakings.  Thus,  vast 
sums  were  drawn  from  the  general  industries  during  the 
first  eight  years  of  the  cycle  I  have  described,  and  were 
'  either  wholly  sunk,  or  the  time  of  payment  became  so  un- 
certain and  long  deferred  as  to  materially  enhance  the 
inciting  causes  of  the  crisis  of  1873,  as  well  as  in  all  pre- 
ceding ones.  There  is,  no  doubt,  a  considerable  degree 
of  extravagance  engendered  by  the  inflation  of  values  and 
the  consequent  high  prices  of  labor,  as  well  as  goods. 
Men  spend  more  on  their  personal  comforts,  embark  in 
wilder  speculations,  and  squander  more  on  luxuries,  in 
such  times.      The  thoughtless  do  not  take  cognizance 


276  CURRENCY. 

of  the  "rainy  days,"  —  of  the  changes  in  fortunes,  or  the 
periodic  recurrence  of  crises.  This  heedlessness  of  eco- 
nomic principles  leads  to  more  or  less  "  over-consump- 
tion." There  is  no  great  warehouse  in  which  this  class 
store  the  superabundance  of  to-day  to  supply  the  press- 
ing needs  of  days  to  come. 

12.  If  the  principles  of  economic  science  were  better 
understood  by  public  men,  and  a  knowledge  of  them 
could  be  more  widely  diffused  among  the  people,  the 
evils  of  over-production  and  over-consumption  would 
gradually  be  reduced  to  a  minimum.  When  the  evils  I 
have  pointed  out  as  largely  resulting  from  protection  in 
the  United  States  shall  become  so  great,  and  of  such 
frequent  recurrence,  as  to  bring  forward  a  new  class  of 
public  men,  and  a  purer  system  of  public  administration 
results  therefrom,  the  country  will  assuredly  throw  off 
the  baneful  trammels  of  protection  and  monopolies  fos- 
tered by  the  States  and  federal  governments.  The  great 
Union  of  States  has  prospered  in  spite  of  these  unnatural 
interferences  with  industry.  Not  protection,  but  free 
trade,  among  forty  States  and  Territories  has  been  the 
mainspring  to  this  prosperity. 

13.  We  have  now  seen  how  protection  first  checked 
the  development  of  agriculture,  stimulated  manufactures, 
by  attracting  capital  and  labor  in  an  unnatural  manner 
from  other  callings,  and  then,  causing  a  plethora  of  such 
unnaturally  fostered  products,  utterly  broke  down,  inflict- 
ing immense  and  long-continued  suffering  on  the  whole 
community,  but  more  particularly  on  the  laboring  classes ; 
and  then,  by  an  equally  logical  result,  unduly  drove  an 
excessive  amount  of  capital  and  labor  back  into  agricul- 
ture. It  first  produces  very  high  prices,  and  then,  by 
its  break- down,  creates  very  low  prices ;  while  true  eco- 
nomic science  teaches  that  steady  employment  in  all 
pursuits,  and  equability  in  prices  of  goods  and  labor,  are 


INDUSTRIAL   CRISES. — THE   CONCLUSION.  277 

most  conducive  to  general  prosperity,  and  the  happiness 
and  advancement  of  society. 

14.  France,  like  the  United  States,  has  been  in  the 
main  a  prosperous  country,  not  by  reason  of  shutting  out 
foreign  productions,  but  because  of  a  wide  expanse  of 
well-cultivated  country,  cheap  communication,  and  a  well- 
organized  system  of  general  industry.  Much,  too,  is 
due  to  the  saving  and  industrious  habits  and  character- 
istics of  the  people.  But,  had  her  statesmen  emulated 
Great  Britain  in  the  breaking  down  the  absurd  and  alto- 
gether useless  barriers  of  protection,  France  would  to-day 
out-rival  all  nations  in  her  home  industries  and  her  for- 
eign commerce.  She  now  has  a  fairly  good  system  of 
government,  and  only  needs  a  commercial  system  founded 
on  the  laws  of  nature,  or  the  true  principles  of  industry, 
which  permit  men  to  buy  and  sell  where  they  please,  and 
not  where  a  few  interested  members  of  society  deter- 
mine for  them,  to  greatly  expand  her  industrial  energies. 
Her  first  consideration,  as  viewed  by  the  economist, 
should  be  a  moderate  revenue  tariff,  and  a  treaty  of  alli- 
ance with  Great  Britain  and  the  Latin  nations,  which 
would  enable  her  to  disband  half  her  armies. 


CHAPTER  XXXI. 


INDUSTRIAL    CRISES. THEIR    CAUSES    AND    REMEDIES    FUR- 
THER  CONSIDERED. THE   CONCLUSION. 

i.  It  appears  from  the  facts  stated  in  the  last  two 
chapters,  and  the  logical  deductions  drawn  therefrom, 
that  industrial  crises  revolve  in  nearly  equal  cycles  of 
time  in  those  countries  to  which  they  are  peculiarly  indi- 
genous. It  was  also  pointed  out  as  an  historical  fact,  that 
those  countries  having  scientific  systems  of  banking  and 


278  CURRENCY. 

currency,  governed  by  the  natural  laws  of  industry,  have 
for  a  long  period  been  almost  wholly  exempt  from  these 
periodic  disturbances.  There  are  still  other  considera- 
tions, to  which  I  invite  the  attention  of  economists  and 
statesmen,  relating  to  causes,  as  well  as  effects  and  reme- 
dies, which  have  not  yet  had  sufficient  discussion.  I 
have  shown  how  those  causes,  leading  to  distrust,  panic, 
and  crisis,  had  their  beginnings  in  the  great  facilities 
afforded  by  banks  of  issue  and  discount  for  expanding 
their  circulation  of  notes,  and,  concurrently  therewith, 
the  volume  of  trading  capital,  by  discounting  commercial 
paper.  It  will  be  recollected  that  I  estimated  that  eighty 
per  cent  of  the  entire  trading  capital  dealt  in  in  the  loan 
market  consisted  of  the  proceeds  of  bills  given  chiefly 
for  goods  in  course  of  production  and  distribution,  and 
pointed  out  that  the  chief  source  of  inflation  was  to  be 
found  in  the  multiplication  of  these  bills.  The  reader 
will  please  keep  these  facts  in  mind. 

2.  I  now  propose  to  inquire  what  part  is  played  by  the 
remaining  twenty  per  cent  of  capital,  which  expands  only 
by  the  slow  process  of  the  savings  of  industry,  and  the 
general  surplus  of  production  over  consumption.  The  sta- 
tistics on  this  subject  are  hardly  better  than  guess-work ; 
though  by  a  careful  analysis  of  bankers'  accounts  for  a 
considerable  time,  and  in  numbers  sufficient  to  give  close 
approximations,  it  might  be  possible  to  reach  a  tolerably 
accurate  estimate.  The  late  Lord  Overstone  estimated  the 
net  annual  savings  of  the  whole  of  Great  Britain  to  have 
been,  some  thirty  years  ago,  about  ^150,000,000  ;  and  we 
may  accept  that  as  the  best  we  have.  We  may  now  claim 
it  to  have  risen  to  ^200,000,000, —  say  $1,000,000,000. 
In  the  United  States  it  will  be  larger,  owing  to  a  greater 
industrial  population,  and  to  the  rapid  development  in 
the  value  of  new  lands  continually  brought  into  cultiva- 
tion, which  is  as  solid  a  source  of  wealth  as  any  other, 
and  is  as  permanent  and  reliable. 


INDUSTRIAL   CRISES. — THE   CONCLUSION.  279 

3.  Here  is  a  question  of  the  very  gravest  description 
for  economists,  and  especially  statesmen,  to  weigh.  If 
we  only  pause,  and  grasp  the  subject,  we  shall  see  that 
the  continual  tendency  to  a  plethora  of  this  kind  of  capi- 
tal is  a  matter  which  forces  itself  on  our  consideration. 
The  effects  of  a  crisis  destroy  a  certain  amount  of  this 
kind  of  capital,  or  actually  acquired  wealth ;  but  there  is 
a  great  fund,  so  to  speak,  placed  by  members  of  all 
industrial  communities  beyond  the  reach  of  destruction 
by  crises.  The  owners  of  this  wealth  become  more  con- 
servative, as  well  as  those  who  hold  it  in  trust,  in  con- 
sequence of  these  disasters  and  losses ;  and  hence  the 
accumulation  goes  steadily  on,  even  in  times  of  depres- 
sion. Hence,  also,  the  rate  of  interest  becomes  very  low 
for  loans  of  such  capital,  and  it  is  sought  by  all  to  lend 
or  invest  it  on  the  highest  order  of  securities.  It  has 
thus  happened  in  Great  Britain,  and  now  lately  in  the 
United  States,  that  these  governments  have  been  able  to 
fund  their  debts  at  very  low  rates.  The  secret  of  Mr. 
Sherman's  funding  $500,000,000  of  6  per  cent  debt 
at  4  per  cent  is  due  to  this  circumstance  ;  and,  had  he 
understood  the  economic  question  better,  he  could  have 
effected  it  at  3.6  or  3.5  per  cent  just  as  readily.  The 
crisis  of  1873,  and  the  destruction  of  confidence  in  other 
more  permanent  investments,  taken  in  connection  with 
the  fact  I  have  stated  about  the  accumulation  of  wealth, 
are  still  in  active  operation  (May,  1879)  >  and  unless  new 
fields  for  investments  of  a  more  permanent  character  are 
opened,  or  a  new  mania  for  speculation  in  goods  and 
railways  sets  in  speedily,  the  balance  of  the  debt  of  the 
United  States  can  readily  be  funded  in  1881  at  3  per 
cent.  Mr.  Sherman  is  only,  after  all,  "  the  fly  on  the 
coach-wheel,"  which  fancied  he  had  "  kicked  up  all  the 
dust." 

4.  It  was  wholly  due  to  this  tendency  to  a  plethora  of 


280  CURRENCY. 

acquired  wealth  that  enabled  England  to  fund  her  debt 
at  3  per  cent ;  and  a  time  may  come  when  it  can  be  re- 
duced by  the  sale  of  terminable  annuities,  or  otherwise, 
to  2  per  cent.  The  rate  in  the  public  markets  just  now 
for  loans  on  government  securities,  in  London  (May, 
1879),  is  1.5  and  3  per  cent.  Consols  may  soon  be  at 
a  premium;  and  United  States  fours  may  go  to  10  pre- 
mium under  a  long-continued  distrust  of  other  securities 
of  a  permanent  character.  I  have  pointed  out,  however, 
that  the  main  cause  of  crises  is  the  discount  of  paper 
given  for  goods,  and  multiplied  by  resales  for  specula- 
tion. But  the  matter  of  accumulated  capital  is  a  prob- 
lem of  vast  proportions.  If  men  cannot  find  fields  for 
safe  and  paying  investments,  there  will  be  a  tendency  to 
spend  more,  or,  more  correctly  speaking,  there  will  be  a 
diminished  motive  to  save,  and  an  increased  and  stimu- 
lated over-consumption. 

5.  This  brings  us  directly  to  the  point  demanding 
the  attention  of  economists  and  public  men,  —  What  can 
be  done  to  enlarge  the  sphere  of  profitable  investments 
in  permanent  undertakings?  We  shall  understand  the 
breadth  and  length  of  the  subject  by  asking  a  few  ques- 
tions. First,  Is  there  a  limit  to  the  productive  enter- 
prises of  the  world?  Second,  Are  we  near  that  limit? 
To  which  I  am  ready  to  answer,  there  is  a  limit,  with 
our  present  methods  of  conducting  the  industries  of  the 
people,  though  very  far  from  being  as  yet  reached.  This 
is  my  answer  to  both  these  questions.  Then  comes  the 
pertinent  and  really  perplexing  question,  What  can  be 
done  to  improve  our  methods  of  production  and  dis- 
tribution, and  provide  an  abundant  field  for  investments 
of  a  permanent  character,  available  and  easily  reached  ? 

6.  I  have  now  broached  the  greatest  problem  of  mod- 
ern society,  and  the  greatest  ever  considered  by  the  econ- 
omist.    The  tendency  to  the  accumulation  of  wealth  in  a 


INDUSTRIAL   CRISES. — THE   CONCLUSION.  28 1 

few  hands  has  often  been  considered  before.  This  result 
of  modern  society  has  been  regarded  by  many  as  set- 
ting a  limit  on  the  equitable  distribution  of  the  results  of 
labor,  and,  in  consequence,  of  the  productive  capacity 
of  the  people.  It  certainly  must  be  acknowledged,  that 
the  motive  to  individual  effort  is  diminished  when  men 
see  great  monopolies  fostered  by  legislation  and  encour- 
aged by  laws  made  almost  wholly  with  the  view  of  pro- 
moting the  interests  of  those  who  have  acquired  in  any 
way  the  control  of  vast  properties,  and  especially  of  the 
improved  methods  of  distributing  goods  and  transporting 
passengers. 

7.  Paine  proposed,  a  hundred  years  ago,  to  limit  the 
accumulation  of  capital  by  taxation.  Various  plans  have 
been  discussed  ever  since  the  days  of  Aristotle,  who  was, 
in  a  sense,  a  communist.  He  advocated  public  tables, 
to  be  supplied  at  the  public  expense,  where  all  might 
assemble,  and  live  alike.  It  is  not  my  purpose  to  enter 
upon  a  long  disquisition  on  this  subject,  which  is  daily 
becoming  more  and  more  a  topic  of  agitation.  The 
method  of  co-operation  seems  to  be  a  success,  and  in 
that  direction  the  solution  of  the  problem  may  be  found. 
It  has  gained  an  extensive  footing  in  Great  Britain, 
though  little  in  the  United  States.  It  is  as  yet  almost 
unknown  in  America,  which  fosters  by  legislation  monop- 
olies in  all  forms.  The  legislatures  of  States  as  well  as 
of  the  Union  have  become  the  instruments  to  do  the  bid- 
ding of  those  who  control  railways  and  conduct  the  chief 
manufactures  of  the  entire  country.  In  these  bodies  men 
are  "  bought  and  sold  like  sheep  in  the  shambles." 

8.  The  subject  I  am  considering  opens  up  the  whole 
question  of  taxation,  in  which  sounder  and  more  equi- 
table principles  are  yearly  gaining  ground  in  Great  Britain, 
where  the  whole  income  of  the  state  is  derived  from  a 
few  articles,  and  these  mostly  belonging  to  the  class  known 


282  CURRENCY. 

as  luxuries,  and  an  income  tax,  which  to  the  largest  ex- 
tent falls  on  those  enjoying  the  accumulations  of  past 
industries  and  such  as  have  drawn  the  higher  prizes  of 
life,  which  is  the  most  equitable  method  of  taxation. 

9.  In  the  United  States,  there  has  not  been  force, 
knowledge,  or  virtue  enough  to  reach  even  a  stepping- 
stone  towards  an  equitable  system  of  taxation.  Legisla- 
tion is  more  or  less  controlled  by  a  system  of  "  lobbyism," 
organized  and  backed  by  combinations  of  capitalists  who 
find  their  advantage  in  protective  duties  and  the  issue  of 
paper  money.  The  Federal  Government  is  deficient  in 
the  matter  of  leadership  in  Congress.  Forty  committees 
in  the  House  of  Representatives,  and  thirty  in  the  Senate 
of  the  United  States,  whose  presiding  officers  are  appointed 
by  barter  and  bargaining,  divide  the  legislative  duties,  and 
are  the  judges  of  what  measures  are  appropriate  for  Con- 
gress to  pass.  Thus,  Congress  has  become  a  sort  of 
"impossible  body,"  as  some  eminent  public  man  once 
characterized  it.  Those  who  administer  the  government 
are  often  without  influence  in  the  Legislature,  in  which 
they  have  no  seats.  It  has  become  a  system  of  cabals 
devoid  of  unity  of  purpose  or  action,  and  is  totally  at  va- 
riance with  any  possible  theory  of  parliamentary  govern- 
ment. The  members  of  both  Houses  concern  themselves 
chiefly  about  the  patronage  to  public  offices  ;  and  hence 
spend  a  large  part  of  their  time  in  "  President  making," 
as  it  is,  no  doubt,  very  properly  called,  or  in  subsidizing 
out  of  the  national  treasury  various  industries. 

10.  The  American  system  was,  perhaps,  well  enough 
suited  to  a  sparse  or  wide-spread  population  possessed 
of  state  administrations,  when  the  whole  did  not  exceed 
four  millions.  But  now,  with  a  population  twelvefold  that 
number,  and  a  vast  accumulation  of  wealth,  it  does  not 
fulfil  the  ends  of  a  free  and  still  rapidly  expanding  people. 
The  "  spread-eagleism  "  and  vague  "  stump  oratory  "  of 


INDUSTRIAL    CRISES. THE    CONCLUSION.  283 

fifty,  or  even  twenty,  years  ago,  begin  to  pall  on  the  tastes 
of  the  people.  Universal  suffrage,  as  in  France  in  the 
days  of  the  second  empire,  has  become  the  key  to  mo- 
nopolies. The  conventions  of  parties  form  an  imperium 
in  imperio,  and  name  the  deputies  they  wish  to  have 
voted  for  at  the  elections  by  those  who  stand  in  the 
light  of  constituents.  These  nominations  are  all  but 
universally  sold  to  those  who  can  pay  most  in  cash,  or  in 
promises  of  official  positions.  Even  the  presidency,  as 
well  as  the  senatorial  honors,  is  in  this  way  sold,  like  the 
Roman  Empire  at  one  period,  to  the  highest  bidder.  Civil 
Service  Reform,  so  successful  in  other  constitutional  coun- 
tries, is  at  this  hour  "a  snare,  a  mockery,  and  a  delusion" 
in  the  United  States.  Neither  party  has  presented  a  well- 
digested  measure  in  Congress,  to  settle  definitively  the 
manner  of  appointing  competent  men  to  fill  the  offices 
of  federal  or  state  administrations,  which  a  President  is 
vainly  trying  to  introduce  in  one  or  two  departments. 

11.  These  considerations  are  pertinent  to  the  subject 
I  am  discussing,  because  they  are  the  stepping-stones  to 
a  more  perfect  system  of  industry,  having  its  foundations 
laid  wide  and  deep  on  those  principles  which  are  termed 
"fundamental,"  or  which  are  deduced  from  the  action  of 
the  natural  laws.  If  we  are  ever  going  to  erect  a  solid 
and  durable  industrial  structure,  we  must  begin  at  the 
bottom,  and  remove  all  the  rottenness  engendered  by 
generations  of  class  legislation  and  interference  with  the 
natural  order  of  things,  and  with  the  tendency  which  every 
thing  has  to  obey  and  become  the  subject  of  those  natural 
laws,  when  let  alone. 

12.  The  duty  of  all  well-organized  governments  is 
clearly  to  protect  the  weak  against  the  strong,  the  en- 
croachments of  the  avaricious  rich  on  the  rights  of  the 
poorer  millions.  In  that  respect  much  has  to  be  done, 
both  in  Great  Britain  and  her  colonies,  and  more  espe- 


284  CURRENCY. 

cially  in  the  United  States.  The  methods  of  gathering 
up  the  small  savings  of  industry  by  rich  or  professional 
speculators,  for  the  purpose  of  carrying  out  costly  under- 
takings whereby  a  few  reap  the  "  lion's  share,"  are  surely 
such  as  should  be  brought  under  state  or  national  super- 
vision. The  granting  of  franchises  of  an  exclusive  nature, 
or  which,  within  certain  territorial  limits,  are  by  the  nature 
of  things  exclusive,  —  such  as  the  right  to  use  streets  in 
cities  for  railway  lines,  or  through  the  country,  where 
competition  cannot  set  a  limit  to  charges  for  the  use  of 
railways,  —  has  become  an  evil  of  vast  proportions,  and  in 
the  United  States  is  steadily  on  the  increase.  These  seem 
to  be  cases  where  some  supervisory  power,  outside  of  the 
Legislature,  like  the  courts  of  judicature,  should  be  estab- 
lished. 

13.  Finally,  the  providing  of  more  extended  methods 
for  absorbing  the  continually  accumulating  savings  from 
labor  and  income  of  all  kinds  must  be  regarded  as  "  a 
safety-valve  "  to  industrial  pursuits.  It  would  be  a  most 
important  gain  to  society  if  there  could  be  some  plan 
devised  to  effect  this  object  in  conformity  with  those  laws 
of  industry  which  free  labor,  or  labor  free  from  the  bane- 
ful trammels  of  protection  imposed  by  legislatures,  always 
develops.  It  is  to  promote  this  end  that  I  have  written 
this  work ;  and  I  hope  the  labor  and  thought  I  have  be- 
stowed on  it  may  lead  others  to  follow  up  the  subject  in 
all  its  branches,  and  aid  in  perfecting  the  economic  edi- 
fice, so  as  to  give  to  it  the  sanction  of  science  and  sound 
logic,  in  which  it  is  as  yet  deficient. 


NOTES. 


I.  —  Postulates  10-16. 

There  is  no  better  established  principle  in  monetary  and 
industrial  science,  than  that  the  market  value,  or  trading 
power,  of  inconvertible  legal-tender  paper  money  is  in  the 
inverse  ratio  of  its  volume.  If  supply  is  in  excess  of  de- 
mand for  industrial  uses,  it  will  manifest  itself  by  a  rise  in 
the  foreign  exchanges,  and  in  a  premium  on  the  metallic 
money  used  as  a  standard  of  value.  Another  circumstance 
connected  with  inconvertible  paper  is  worth  noticing.  If  it 
be  not  legal  tender,  it  will  be  quoted  at  a  discount  on  metal, 
instead  of  the  reverse,  just  as  the  United  States  legal-tender 
notes  are  quoted  in  Canada,  and  other  places  where  they  are 
not  legal  tender.  It  will  therefore  be  seen,  that,  under  a 
single  issue  department,  like  the  Bank  of  France,  it  is  per- 
fectly practicable  to  hold  legal-tender  paper  at  par  with  gold, 
or,  as  Mr.  J.  B.  McCulloch  has  it,  to  raise  it  above  par  of  gold 
simply  by  a  limitation  of  its  quantity.  But  I  have  elsewhere 
very  clearly  shown,  that  there  would,  in  such  case,  be  wanting 
the  elasticity  of  metallic  money,  which,  like  the  waters  of  the 
ocean,  the  lakes,  and  the  rivers,  continually  tends  towards 
equilibrium. 

Although  the  proposition  is  self-evident  and  logically  true, 
it  is  very  little  regarded  by  public  men.  An  analysis  of  the 
circulation  of  the  Bank  of  England,  during  its  twenty-one 
years'  suspension,  shows  very  conclusively,  that  the  market 
value  of  the  bank  note  fluctuated  in  conformity  with  the  over- 
ruling law  of  supply  and  demand.  And,  in  March  (1878),  we 
see  the  effects  of  contraction,  both  by  the  surrender  of  over 
$40,000,000  of  national  bank  circulation  in  the  United  States, 
and  of  some  $15,000,000  of  legal-tender  notes  retired  under 

285 


286  CURRENCY. 

the  so-called  Resumption  Act.  Both  kinds  of  paper  money 
have  risen  to  within  three-fourths  of  one  per  cent  of  gold 
par.  What  effect  the  overvalued  silver  coinage,  just  now 
being  set  afloat,  may  have  on  the  future  value  of  paper  money- 
will  require  a  little  time  to  determine ;  but  it  is  as  certain  as 
that  the  earth  revolves  on  its  axis,  if  the  Silver  Law  remains 
in  force  long  enough  to  produce  a  circulation  anywhere  from 
$100,000,000  to  $200,000,000,  both  silver  and  paper  will  fall 
to  the  level  of  the  market  value  of  the  metal ;  and  further- 
more, if  the  paper  inflationists  succeed  in  getting  out  more 
paper,  silver  in  its  turn  will  be  driven  out  of  circulation,  and 
will  be  at  a  premium,  as  measured  by  the  paper  standard. 
The  laws  of  nature  are  immutable ;  and  there  will  then  be 
three  measures  of  value,  and  traders  can  take  their  choice. 

The  Bank  of  France  is  now  (March,  187S)  in  the  seventh 
year  of  suspension,  but  its  notes  have  been  held  at  par  with 
gold  by  the  limitation  placed  on  their  issue.  So  also  has  the 
value  of  silver  coin  been,  in  like  manner,  maintained  by  the 
cessation  of  its  coinage  the  moment  depreciation  set  in. 
Every  schoolboy  ought  to  learn  this  self-evident  fundamental 
principle  :  that  every  thing  having  market  value  is  subject  to 
the  great  governor  of  values. 

II.  —  Postulates  35,  36. 

The  distinction  between  the  two  kinds  of  capital,  or  trad- 
ing power,  dealt  in,  in  the  loan  market,  is  very  obvious.  As 
before  stated,  it  is  so  clear  that  bankers  and  loan  brokers 
might  readily  separate  them  in  their  accounts.  A  general 
statement  of  the  proceeds  of  all  bills  discounted,  which  sup- 
ply the  chief  trading  fund  of  a  banker,  separated  from  other 
deposits,  would  very  accurately  determine  the  comparative 
amounts  of  the  two  kinds. 

It  may  sound  a  little  paradoxical  to  say  so,  but  it  is  abso- 
lutely true,  as  a  matter  of  fact,  the  borrowing  customer  of  a 
banker  is  a  lender  to  the  banker  of  the  value  which  he  lends 
back  again  to  the  borrower.  It  is  the  check  that  does  the 
work,  —  the  check  that  very  seldom  is  converted  into  actual 
money.     In  effect,  the  banker  simply  lends  a  man  back  his 


NOTES.  287 

own  property  made  into  trading  power  by  means  of   the 
check. 

True  it  is,  there  is  another  class  who  lend  to  the  banker 
balances  of  accumulated  capital,  —  the  savings  of  industry, 
and  of  income  over  outlay,  —  who  are  seldom  borrowers ; 
and  the  contributions  of  this  class  to  a  banker's  stock  of 
trading  power  he  can  trust  to  as  a  trading  margin,  though 
such  deposits  go  into  the  common  pool  from  which  all  draw 
their  supplies.  This  pool,  I  have  elsewhere  shown,  is  also 
increased  in  volume,  by  the  usual  balances  of  all  sound 
traders  held  by  them  at  their  bankers  to  meet  promptly  any 
and  all  emergencies,  —  such  as  unpaid  bills  of  customers, 
returned  drafts,  etc. 

III.  —  Postulate  38. 

Inasmuch  as  the  true  and  natural  regulator  of  the  rate  of 
interest,  which  is  the  price  paid  for  the  use  of  capital,  is  the 
law  of  supply  and  demand,  all  artificial  methods  of  controlling 
such  rate  are  clearly  and  fundamentally  wrong,  and  injurious 
to  the  industries  of  the  people.  In  my  chapters  on  the  Bank 
of  England,  I  have  pointed  out  the  fact,  that  the  practice  of 
the  bank  of  raising  and  lowering  the  rate  was  justified,  on  the 
plea  that  it  was  necessary  to  "  act  on  the  exchanges  "  in 
order  to  regulate  the  trade  in  bullion.  I  wish  to  make  the 
case  quite  clear,  as  to  the  effect  of  the  practice  on  the  busi- 
ness affairs  of  the  country.  The  rationale  is,  that  the  raising 
of  the  rate  makes  dear  capital,  and  dear  capital  makes  dear 
goods.  Consequently  it  prevents  the  shipment  of  all  kinds 
of  goods  as  well  as  bullion,  and  thus  acts  injuriously  on  the 
general  trade.  This  amounts  to  logical  demonstration,  and 
shows  the  bad  effects  of  the  practice  of  the  bank  of  med- 
dling with  the  natural  regulator  of  the  loan  market. 

This  fundamental  truth  will  become  still  more  striking, 
when  we  consider  that  the  sales  of  goods  create  the  bills 
discounted  in  the  loan  market,  where  they  constitute  a  pre- 
ponderating proportion  of  the  trading  power  loaned.  There 
can  be  no  pretext  set  up  that  the  trade  in  bullion,  which  the 
bank  seeks  to  control,  is,  in  any  respect  whatever,  different 


2  88  CURRENCY. 

in  principle  from  that  of  the  trade  in  any  other  commodity. 
The  prominence,  therefore,  given  to  the  bullion  trade  by 
newspaper  writers,  merchants,  and  bankers,  is  wholly  with- 
out justification,  and  simply  misleads  the  public.  There  is 
no  mysterious  relation,  as  implied  in  Mr.  Seyd's  plan  of  "es- 
tablishing a  more  equitable  working  system  between  bullion 
and  interest."  The  idea  is  an  offshoot  of  the  old  "  mercan- 
tile theory."  Mr.  Seyd  might,  with  equal  propriety,  set  up  a 
claim  in  favor  of  cheese  or  any  other  commodity  that  is  the 
subject  of  foreign  trade,  as  "  all  things  dealt  in,  in  domestic 
and  foreign  trade,  exert  an  influence  on  the  .price  of  capital 
in  the  ratios  of  their  respective  gross  values."  The  bullion 
theory  is  an  absurdity. 

IV. —  Chap.  XL 

The  following  excellent  exposition  of  the  errors  respect- 
ing the  balance  of  trade  is  from  the  pen  of  a  practical  busi- 
ness man  in  New  York, —  Mr.  Charles  H.  Marshall:  — 

[From  "  The  New  York  Herald,"  Jan.  23,  1878.] 

THE  BALANCE  OF  TRADE.  —  ABSURDITY  OF  THE  THEORY  THAT 
WE  ARE  RICHER  BECAUSE  WE  EXPORT  MORE  THAN  WE  IM- 
PORT.—  AN    ELUCIDATION    BY    CHARLES    H.    MARSHALL. 

To  the  Editor  of  the  Herald. 

In  the  excellent  report  of  the  committee  of  bank  officers,  sub- 
mitted to  the  meeting  at  the  Clearing-House,  occurs  a  reference  to 
the  improving  condition  of  the  country  as  shown  by  the  so-called 
"balance  of  trade,"  which  is  said  to  be  at  present  in  our  favor 
instead  of  against  us,  as  in  previous  years ;  and  the  writer  of  the 
report  would  lead  one  to  infer,  that,  in  his  opinion,  this  is  a  de- 
sirable condition  for  a  nation  to  occupy  permanently  in  respect  to 
its  commercial  transactions.  Now,  I  have  no  disposition  to  criti- 
cise a  document  so  faithfully  and  ably  written  as  this  report,  and 
which  it  is  hoped  will  produce  the  best  results  in  averting  the  pas- 
sage of  the  silver  swindle  ;  but  it  seems  to  me  that  this  "balance 
of  trade  "  theory  is  a  delusion  which  ought  to  be  dispelled,  as  facts 
show  that  what  we  are  accustomed  to  call  "  a  favorable  balance  " 
is  in  reality  an  unfavorable  one,  and  that,  instead  of  regarding  the 
existence  of  the  former  as  a  subject  of  congratulation,  it  is  in 
reality  an  indication  of  national  poverty. 


NOTES.  289 

Now,  what  are  the  facts  in  regard  to  the  "  balance  of  trade,"  so 
termed?  They  are  these:  Creditor  nations  —  nations  which  draw 
largely  of  the  world's  wealth,  consequently  rich  nations  —  generally 
show  what  we  would  call  an  unfavorable  balance  of  trade.  A  sin- 
gle example  will  suffice.  In  1842  the  exports  of  Great  Britain 
exceeded  her  imports  by  some  ^38,000,000.  But  was  she  then 
in  a  prosperous  condition  ?  Far  from  it.  On  the  contrary,  pov- 
erty and  starvation  were  everywhere  rife.  The  wages  of  the  best 
laborers  averaged  but  six  to  seven  shillings  a  week,  while  in  the 
manufacturing  districts  it  seemed  as  if  ruin  must  overtake  both 
employer  and  employed.  From  1854  to  1S76  the  imports  of  Great 
Britain  were  largely  in  excess  of  the  exports.  In  no  year  has  this 
excess  fallen  much  below  £24,000,000  (exclusive  of  bullion  and 
specie),  and  in  1876  the  preponderance  of  imports  over  exports 
(not  estimating  specie)  was  ,£118,378,111.  From  1854  to  1874 — a 
period  of  twenty  years  —  the  excess  is  estimated  at  £1,107,855,114. 
This  includes  both  specie  and  bullion. 

Clearly,  then,  England  has  been  growing  poorer  during  this 
period,  according  to  the  "  balance  of  trade  "  theorists.  But  has 
she  in  fact  ?  A  morning  paper  published  a  long  article,  a  few 
days  since,  to  prove  that  she  is  becoming  gradually  impoverished, 
—  spending  her  capital  and  savings,  so  to  speak;  but,  somehow 
or  other,  she  does  not  seem  to  show  it.  Pauperism  has  decreased 
within  her  borders ;  taxes  have  been  diminished  (notably  the  cus- 
tom duty  on  sugar,  which  yielded  £5,000,000  per  annum,  and 
which  has  been  done  away  with  altogether) ;  her  commerce  has 
steadily  increased  ;  her  fleets  cover  every  sea  ;  she  raised  last  year, 
by  a  purely  revenue  tariff,  £19,994,882.  Is  her  poverty  so  very 
serious,  after  all  ? 

Now,  take  our  own  case.  From  1855  to  1S75  the  "balance  of 
trade"  was  in  our  "favor"  (so  termed)  but  three  times,  and  always 
in  times  of  panic  and  commercial  disaster ;  while  during  the  peri- 
ods of  our  greatest  prosperity  and  most  rapid  growth  the  "  balance 
of  trade  "  has  been  against  us.  In  other  words,  we  have  in  sea- 
sons of  prosperity  ostensibly  bought  from,  more  than  we  have 
sold  to,  foreign  countries.  In  1858,  after  the  panic  of  1S57,  the 
conditions  were  reversed,  and  we  had  a  "favorable"  balance  of 
$8,672,000.  In  1862  it  was  $1,315,000  ;  and  in  1S74,  after  the  panic 
of  1873,  il  rose  t0  $18,876,000.  All  these  three  periods  were  cer- 
tainly not  prosperous  episodes  in  our  history. 

With  the  exception  of  the  above  period,  the  "balance  of  trade  " 
was  invariably  against  us,  and  from  1855  to  1875  amounted  to 


29O  CURRENCY. 

$2,410,721,000.  Will  any  one  contend  that  this  showing  indicated 
poverty,  while  the  present  indicates  wealth  ?  I  should  hardly  think 
so,  if  facts  be  consulted.  But  consider  if  it  is  not  absolutely  essen- 
tial that  a  country  which  does  a  profitable  business  with  other 
nations  should  show  a  "balance  of  trade"  against  it?  I,  for  in- 
stance, ship  1,000  barrels  of  flour  to  the  Liverpool  market,  which 
cost  me,  say,  $5,000.  I  expect  to  sell  them  at  a  profit ;  and  as  a 
matter  of  fact  I  do  realize  on  my  venture,  say,  $1,000.  I  thus  have 
a  sum  amounting  to  £1,200,  or  thereabouts,  the  total  result  of 
my  shipment.  I  buy  with  this  sum  ,£1,200  of  Manchester  cot- 
tons, which  I  import  into  the  United  States.  The  custom-house 
returns  show  here  an  excess  of  imports  over  exports,  on  this  one 
transaction,  of  $1,000.  But  am  I  poorer  ?  Am  I  not  richer  to  the 
extent  of  this  sum,  and  is  not  the  country  of  which  I  am  a  citizen 
richer  as  well  ? 

The  late  Mr.  Horace  Greeley  used  to  consider  that  a  Utopian 
prosperity  consisted  in  a  condition  of  society  where  all  should  sell 
and  none  should  buy.  This  is  what  "protection"  in  vain  seeks  to 
accomplish.  But  when  Mr.  Evarts  said,  on  a  late  occasion,  that, 
if  we  would  sell  to  foreign  nations,  we  must  buy  from  them,  he 
uttered  a  truth  which  annihilated  the  "balance  of  trade"  theory 
at  a  blow.  And  I  will  add,  that,  if  we  sell  at  a  profit  to  foreign 
nations,  we  must  buy  from  them,  as  expressed  in  money  values, 
more  than  we  give  ;  else  we  are  trading  at  a  loss.  True  it  is  that 
our  present  exports  are  gradually  liquidating  our  debts  abroad ; 
and,  so  far  as  we  are  doing  this,  we  may  congratulate  ourselves  : 
but  we  cannot  point  to  it  otherwise  than  a  proof  that  we  are  not 
rich.  When  real  prosperity  comes  to  us,  and  our  debts  are  can- 
celled, it  will  be  found  that  we  will  return  (as  all  should  wish  we 
may  return)  to  a  condition  of  trade  when,  our  capacity  to  consume 
being  increased,  we  shall  take  largely  of  foreign  products ;  and  if 
our  imports  then  exceed  our  exports,  according  to  custom-house 
valuations,  there  will  be  nothing  in  this  to  create  apprehension. 
On  the  contrary,  it  should  inspire  confidence  and  hope. 

I  am,  etc., 

CHARLES  H.  MARSHALL. 


APPENDIX   I. 


VIEWS   OF   M.   MICHEL   CHEVALIER   ON   THE   PREROGATIVE   OF  THE 
STATE   TO    ISSUE   PAPER   MONEY. 

The  first  of  the  following  letters,  which  the  writer  had 
the  honor  to  receive  from  the  above-named  eminent  French 
economist,  was  published  in  a  pamphlet  which  he  issued 
in  London,  in  1S74,  on  the  erroneous  policy  of  the  Bank  of 
England  in  the  matter  of  its  efforts  to  regulate  the  price 
of  capital  by  raising  and  lowering  the  "rate,"  in  order  to 
control  the  trade  in  bullion :  — 

[Translation.] 

27  Avenue  de  l'Imperatrice, 
Paris,  7th  March,  1872. 

Dear  Sir,  —  I  must  apologize  for  the  delay  in  answering  your 
letter  of  the  26th  December.  The  reason  of  this  delay  is  the  atten- 
tion which  this  letter  merits.  It  is  perfectly  logical,  and  based  on 
the  correct  principles  of  the  science  of  political  economy  in  relation 
to  currency.  Unfortunately,  most  governments  ignore  or  depre- 
ciate these  principles,  and  too  readily  trample  them  under  foot. 
If  the  American  Government  had  conformed  to  them  during  the 
war  of  secession,  their  enormous  debt  would  have  been  smaller  by 
hundreds  of  millions.  If  the  Government  of  France  had  even  a 
faint  knowledge  of  these  principles,  it  would  not  have  issued  such 
a  dangerous  amount  as  2,800,000,000  of  francs  ($560,000,000)  of 
paper  money,  with  the  possibility  of  internal  trouble. 

It  might  be  well  to  quote  the  words  addressed  by  the  Swedish 
Chancellor  Oxenstiern  to  his  son,  when  the  young  man  was  about 
to  visit  the  courts  of  Europe  :  "  Go,  my  son,  and  see  with  how  little 
wisdom  the  world  is  governed." 

I  am  therefore  much  impressed  by  your  letter,  and  the  pamphlet 
which  accompanied  it,  —  "A  Plea  for  Uncle  Sam's  Money,"  — and 

291 


292  CURRENCY. 

have  been  waiting  to  find  time  to  reply  at  some  length.  But  I  fear 
I  may  do  wrong  to  defer  longer,  as  this  might  lead  you  to  believe 
that  your  communication  is  indifferent  to  me,  when  the  contrary  is 
the  case.  And,  besides,  why  should  I  write  you  a  long  letter  ?  I 
have  not  to  convert  you,  since  on  the  whole  we  are  of  the  same 
opinion. 

The  fundamental  principle  on  which  you  base  your  arguments 
[theory]  is,  that  the  power  of  issuing  paper  currency  belongs  to 
the  state,  and  is  one  of  the  essential  attributes  of  the  state  for  the 
same  reason  as  the  coining  of  specie,  or  metallic  money.  This 
principle  being  conceded,  the  granting  of  the  power,  without  com- 
pensation, to  a  company  of  private  stockholders,  is  in  the  nature 
of  a  feudal  monopoly.  Perhaps,  if  it  were  sold  to  such  companies 
for  its  value,  and  the  proceeds  paid  into  the  national  treasury  for 
the  benefit  of  the  public  at  large,  no  grave  inconvenience  would 
result  to  the  nation.  (This  is  a  delicate  question  to  examine  and 
determine.)  But  the  giving  it  without  an  equivalent  is  an  unjusti- 
fiable sacrifice  of  public  interests. 

In  the  years  1833  and  ^44  this  subject  was  under  consideration 
in  the  British  Parliament,  and  resulted  in  a  remarkable  exposition 
of  principles,  entirely  in  accordance  with  your  ideas.  The  two 
most  considerable  personages  who  took  part  in  these  discussions 
were,  first,  in  1833,  Lord  Althorp,  then  Chancellor  of  the  Ex- 
chequer in  the  Liberal  ministry  of  Earl  Grey ;  and  in  1844,  Sir 
Robert  reel,  then  First  Lord  of  the  Treasury.  Lord  Althorp,  not 
having  a  clear  idea  of  what  was  done  afterwards,  —  the  division  of 
the  Bank  of  England  into  two  departments,  the  one  for  the  issue 
of  notes,  and  the  other  for  banking,  —  and  fearing  the  confound- 
ing of  the  two  in  the  hands  of  the  Government,  became  excessively 
cautious ;  but  he  thought  the  profit  of  the  issue  should  belong  to 
the  Government. 

Sir  Robert  Peel  supported  the  same  views  in  more  decided  lan- 
guage in  a  passage  of  his  speech  in  the  House  of  Commons  on  the 
6th  of  May,  1844.  The  reason  which  led  the  Parliament  of  Great 
Britain,  in  that  year,  to  agree  to  the  proposition  of  that  statesman, 
and  abandon  the  idea  of  reserving  to  the  Government  the  benefit 
of  the  issue,  administered  directly  by  the  Government  itself,  was 
the  prejudice  of  the  English  nation  for  customs  consecrated  by 
time  and  tradition.  He  presses  in  this  speech  that  sentiment  in 
the  following  striking  words  :  — 

"  The  true  policy  in  this  country  is  to  work  as  far  as  possible 
with  the  instruments  you  have  ready  at  hand  ;  to  avail  yourselves 
of  the  advantages  which  they  possess  from  having  been  in  use — > 


APPENDIX.  293 

from  being  familiar — from  constituting  a  part  of  the  habits  and 
usages  of  society.  They  will  probably  work  more  smoothly  than 
perfectly  novel  instruments  of  greater  theoretical  perfection.  If 
we  disturb  that  which  is  established,  let  us  have  some  good  prac- 
tical reason  for  the  change." 

I  shall  feel  obliged,  my  dear  sir,  to  be  informed  of  the  progress 
of  this  discussion  in  America ;  and  I  beg  you  to  accept  my  distin- 
guished consideration. 

MICHEL  CHEVALIER. 
H.  Bowlby  Willson,  Esq.,  New  York. 

The  following  is  the  passage  in  Sir  Robert  Peel's  speech, 
first  referred  to  by  M.  Chevalier,  which  he  kindly  furnished 
with  his  letter  above  given  :  — 

"  Some  have  contended,  and  I  am  not  one  to  deny  the  position, 
that,  if  we  had  a  new  state  of  society  to  deal  with,  the  wisest  plan 
would  be  to  claim  for  the  state  the  exclusive  issue  of  promissory 
notes,  as  we  have  claimed  for  it  the  exclusive  privilege  of  coinage. 
Thev  consider  that  the  state  is  entitled  to  the  whole  profits  derived 
from  that  which  is  the  representative  of  coin ;  and  that,  if  the  state 
had  the  exclusive  power  of  issuing  paper,  there  would  be  estab- 
lished a  controlling  power  which  would  insure,  as  far  as  possible, 
an  equilibrium  in  the  currency." 

II. 

[Translation.] 

27  Avenue  de  l'Imperatrice, 
Paris,  June  17,  1876. 

Dear  Sir,  —  I  received  a  long  time  ago  your  pamphlet,  "The 
Money  Question,"  in  which  you  did  me  the  honor  to  insert  one  of 
my  letters.  I  have  delayed,  from  day  to  day,  to  thank  you,  and 
now,  when  I  write,  incur  the  risk  of  my  letter  no  longer  finding  you 
in  London'.  This  would  vex  me  much.  I  shall  therefore  be  greatly 
obliged  if  you  will  write  me  a  few  lines  on  the  receipt  of  this. 

I  have  to  observe  the  sound  doctrine,  —  the  privilege  of  issuing 
bank  notes  (paper  money)  ought  to  be  reserved  to  the  state  which 
should  derive  the  advantages  and  profits.  You  are  right  in  main- 
taining this  opinion,  and  it  is  what  must  finally  prevail  in  America. 
But,  besides  this  which  I  have  already  communicated  to  you  by 
letter,  I  have  something  else  to  say.  It  is,  that  ten  years  ago  I 
advocated  this  opinion  in  a  series  of  articles  bearing  my  name  that 
appeared  in  the  "  Journal  des  Debats."      This  newspaper,  being 


294  CURRENCY. 

highly  esteemed,  you  will  probably  find  in  some  of  the  Paris  Clubs. 
The  numbers  in  which  these  articles  appeared  were  the  4th,  nth, 
and  16th  February,  2d  March,  and  one  in  May,  1S64.  I  do  not 
recollect  the  exact  date  of  the  last, — it  may  be  the  6th,  7th,  or 
8th.  If  you  find  them,  I  should  like  you  to  read  the  observations 
on  banking  generally.  But  the  point  on  which  I  have  mainly  in- 
sisted is,  that  in  future  the  right  to  make  and  issue  bank  notes 
payable  to  bearer  should  be  reserved  to  the  state ;  that  is,  to  who- 
ever directs  the  United  States  Government. 
I  remain,  dear  sir, 

Faithfully  yours, 

MICHEL  CHEVALIER. 

H.    Bowlbv   Willson,   Esq., 
30  Montague  Place,  Russell  Square,  London. 

III. 
THE   STATE  ISSUE   DEPARTMENT   FOR   INDIA. 

The  following  information  respecting  the  introduction 
of  paper  money  into  India  was  kindly  furnished  the  writer 
by  direction  of  the  Marquis  of  Salisbury,  Chief  Secretary 
for  India,  and  will  be  interesting,  especially  to  American 
readers : — 

India  Office,  S.W.,  8th  April,  1876. 

Sir,  —  I  am  directed  by  the  Secretary  of  State  for  India,  in 
council,  to  acknowledge  the  receipt  of  your  letter,  dated  24th 
March  last,  requesting  information  regarding  the  metallic  and  paper 
circulation  in  India,  for  publication  in  a  work  you  are  preparing  on 
this  subject  with  reference  to  the  principal  commercial  countries  of 
the  world  ;  and  I  have  now  to  reply  to  your  questions  in  the  order 
in  which  they  appear :  — 

1.  The  denominations  of  silver  coins  in  India  will  be  found  on 
reference  to  sect.  6  of  the  accompanying  Act  relating  to  Indian 
coinage,  with  which  I  am  directed  to  furnish  you. 

2.  The  total  amount  of  silver  coined  and  issued  during  the  last 
twenty  years  (1856  to  1S74-5  inclusive)  is  stated  to  have  been 
,£142,190,605  ;  but  there  is  no  means  of  stating  the  amount  in  cir- 
culation in  India. 

3.  The  amount  of  paper  circulation  in  India,  as  it  stood  on  the 
1st  January,  1876,  was,  rupees,  112,158,630  (about  ^11,110,000). 
The  denomination  of  notes  so  circulated  were  for  5,  10,  20,  50,  100, 
500,  1,000,  and  10,000  rupees,  each. 


APPENDIX. 


295 


4.  These  notes  circulate,  not  only  in  towns,  but  commonly 
throughout  India ;  and,  though  at  first  not  generally  understood, 
appear  now  to  be  highly  appreciated  by  the  people. 

5.  This  question  (which  related  to  the  economizing  of  metal  by 
the  issue  of  one  or  two  lower  denominations  of  notes  so  as  to  meet 
the  wants  of  the  vast  number  of  small  dealers  and  laborers)  is 
clearly  a  matter  of  conjecture,  and  the  Secretary  of  State  must 
decline  to  express  an  opinion  on  the  subject. 

6.  Gold  is  not  a  legal  tender  in  India;  but  you  will  find  at  sect. 
4  of  the  Act  which  accompanies  this  letter,  the  denominations 
which  may  legally  be  coined.  It  can,  however,  be  considered  in 
the  light  of  bullion  only,  and  fluctuates  as  such.  The  coinage 
(gold)  is  very  limited  in  India,  amounting  to  .£1,178,363  during  the 
years  1S55  to  1873-4  inclusive. 

I  am  instructed  by  Lord  Salisbury,  to  add  in  conclusion,  that 

information  is  being  collected  by  the  Committee  of  the  House  of 

Commons  appointed  to   consider  the  important  question  of  the 

present  depreciation  of  silver,  which  will  be  accessible  to  the  public 

on  the  issue  of  their  report. 

I  am,  sir,  your  obedient  servant, 

GEORGE   HAMILTON. 
H^  Bowlby  Willson,  Esq. 

IV. 

The  Act  referred  to  in  the  above  letter  of  Lord  George 
Hamilton,  Under  Secretary  of  State  for  India,  went  into 
force  in  1861 ;  and  below  will  be  found  tables  showing  the 
denominations  of  notes  issued,  and  their  value  in  sterling, 
and  the  progress  and  fluctuations  in  the  volume  of  notes. 


DENOMINATIONS 

OF  NOTES. 

10,000 

rupees, 

or 

£ 

[,000 

sterling. 

1,000 

" 

u 

IOO 

" 

500 

i< 

" 

50 

" 

IOO 

" 

« 

10 

" 

5° 

" 

" 

5 

a 

20 

<< 

" 

2 

<< 

IO 

" 

<« 

1 

« 

296 


CURRENCY. 


The  law  authorizing  the  issue  of  state  notes  went  into 
force  on  Jan.  1,  1861,  as  above  stated;  and  the  following 
table,  made  up  in  each  year  to  the  30th  March,  shows  the 
result  of  its  operation  in  pounds,  and  is  taken  from  "  The 
Statesman's  Year  Book"  for  1876:  — 


1862  ....  .£3,690,000 

1S69  .     . 

•  Z9-959.296 

IS63 . 

4,926,000 

1S70  .    . 

.    10,470,883 

IS64  . 

5,350,000 

1S71  .     . 

•    10,437,291 

1865. 

7>427»327 

1872  .    . 

•    13,167,917 

IS66 . 

6,898,481 

1873  •    • 

.    12,864,037 

IS67  . 

8,090,868 

1874  .    . 

•    ii>i4&I9i 

1868 . 

9,069,569 

V. 

VIEWS   OF   GENERAL   SPINNER,   LATE   UNITED   STATES   TREASURER, 
ON    PAPER    MONEY. 

Treasury  of  the  United  States, 
Washington,  Feb.  8,  1873. 

Dear  Sir,  —  Your  letter  of  the  6th  inst.  has  been  received. 

It  is  of  little  consequence,  in  a  practical  point  of  view,  whether 
paper  money  can  be  accepted  as  money  in  a  scientific  point  of  view, 
or  not.  It  seems  to  be  settled  now  that  it  answers,  under  certain 
conditions,  all  the  purposes  as  a  circulating  medium  for  which  a 
metallic  currency  is  used  in  our  country.  This  is  an  accepted  fact, 
whether  it  can  be  demonstrated  on  scientific  principles  or  not.  It 
will  therefore  be  necessary  to  accept  the  fact  that  paper  money 
can  be  used  as  money. 

That  there  can  be  too  much,  as  well  as  too  little,  money  is  true 
to  a  degree,  even  with  an  exclusively  metallic  currency. 

I  have  been  drifting  to  the  opinion,  that,  inasmuch  as  more  cir- 
culation is  required  in  most  industrial  and  commercial  communities 
at  certain  seasons  of  the  year  than  at  other  times,  the  question  is, 
how  to  give  the  currency  such  an  elastic  quality  that  it  will  adjust 
and  accommodate  itself  to  the  real  business  wants  of  a  community 
at  all  seasons  and  times. 

Against  preconceived  opinions,  I  have  come  to  the  conclusion, 
that,  of  all  the  devices  that  have  as  yet  been  proposed,  the  one  to 
authorize  a  limited   amount  of  United  States  stocks,  bearing  an 


APPENDIX. 


297 


interest  of  3.65  per  cent  per  annum,  that  would  be  exchangeable 
for  legal-tender  notes,  and  redeemable  with  legal-tender  notes  at  all 
times,  at  the  option  of  the  holder  of  either,  these  securities  would 
more  nearly  satisfy  the  desired  object  than  any  other  plan.  I  men- 
tion 3.65  as  the  rate  of  interest,  because  this  sum  is  just  one  cent  a 
day  on  one  hundred  dollars,  and  would  be  easily  computed ;  be- 
sides, being  too  low  for  a  permanent  investment,  and  high  enough 
to  attract  temporary  investments  when  money  is  abundant. 

I  hope  you  will  publish  your  well-digested  opinions.  7'he  ques- 
tion of  finance  is  the  absorbing  one  now,  and  will  continue  to  be 
until  it  is  finally  settled.  The  views  of  all  thinkers  on  the  subject 
should  be  drawn  out,  so  that  those  whose  business  it  will  be  to 
settle  the  question  may  have  the  opportunity  to  examine,  compare, 
and  digest  them.  In  this  way  they  will  more  surely  arrive  at  cor- 
rect conclusions. 

Very  respectfully  yours, 

F.  E.  SPINNER. 
H.  B.  Willson,  Esq.,  New  York. 

VI. 

Treasury  of  the  United  States, 
Washington,  May  17,  1874. 

Dear  Sir,  —  Your  letter  of  the  15th  inst.  has  been  received. 

I  also  received,  several  days  since,  your  instructive  pamphlet  on 
"  The  Money  Question ;  "  and  I  read  it  with  much  satisfaction. 

Your  criticisms  on  my  plan  to  prevent  the  annual  alternate 
superabundance,  and,  after,  painful  stringency,  in  the  money  marts 
of  the  country,  is  made  in  a  manner  so  frank  and  fair  that  I  have 
no  reason  to  find  fault  with  it  or  with  you. 

With  you,  I  agree  "in  the  propriety  of  preserving  the  green- 
backs, and  abolishing  the  bank  paper  money."  But  this  is  now 
impracticable.  The  banks  are  strong  enough  to  rule  both  the 
Government  and  the  people. 

The  whole  tendency  of  things  is  altogether  in  the  other  direction 
from  what  we  would  have  it ;  and  we,  and  those  who  think  with  us, 
can't  help  it. 

The  policy  now  is,  to  increase  the  number  of  banks  and  their 
circulation,  and  to  restrict  the  treasury  issues.  So  matters  will 
have  to  drift  for  a  while  longer. 

I  doubt  whether  any  Washington  newspaper  would  publish  the 
letter  of  M.  Chevalier.1 

1  This  paragraph  refers  to  the  refusal  of  the  leading  journals  of  New  York  to 
publish  M.  Chevalier's  views  in  favor  of  the  right  of  the  nation  to  issue  and  possess 


298  CURRENCY. 

The  whole  of  your  pamphlet  ought  to  have  an  extensive  circula- 
tion.    It  would  do  much  good. 

Very  respectfully  yours, 

F.  E.  SPINNER, 

Treas.  of  the  U.  S. 
H.  Bowlby  Willson,  Esq.,  New  York. 

VII. 

Gen.  Spinner  has  lived  long  enough  to  see  his  fears 
about  the  power  of  the  national  banks  to  "rule  both  the 
Government  and  the  people  "  of  the  United  States  on  the 
currency  question,  severely  shaken,  if  not  wholly  dissipated, 
at  least  for  a  time.  The  danger  now  is,  that  the  advocates 
of  a  national  currency,  of  all  shades,  having  united,  and 
passed  a  law  to  issue  a  silver  dollar,  overvalued  nearly  ten 
per  cent,  will  lose  their  power  to  control  the  public  sentiment 
in  favor  of  a  sound  specie-paying  national  currency.  There 
being  no  need  for  a  silver  dollar  when  the  people  are  satis- 
fied with  a  greenback  dollar  equal  to  and  payable  in  gold, 
the  silver  coin  will  drag  the  greenback  down  to  its  own  level 
of  ninety-two  cents,  just  so  soon  as  enough  are  got  in  circu- 
lation to  7'ule  the  market.  It  is  one  of  those  notable  illus- 
trations of  the  moral  of  the  fable  of  the  dog  that  lost  the 
substance  (of  the  piece  of  meat)  by  dropping  it  in  the  stream, 
to  catch  at  the  shadow  he  saw  on  the  surface  of  the  water. 

VIII. 

The  following  remarks  or  criticisms  on  the  money  ques- 
tion in  America,  including  a  plan  suggested  for  transferring 
the  national  bank  issue  of  notes  to  the  nation,  are  repro- 
duced from  the  pamphlet  issued  by  me  in  London,  in  1874, 
referred  to  by  M.  Chevalier  in  his  second,  and  also  by  Gen. 
Spinner  in  his  second  letter,  already  given  in  this  Appendix. 
The  letter,  addressed  to  Gen.  Spinner  for  President  Grant, 
the  general  had  copied  and  laid  before  the  President,  then 
an  ardent  "  greenbacker,"  just  before  his  sudden  conversion 
to  the  pro-bank  party. 

the  profits  of  paper  money.  All  the  pro-bank  journals  have  long  closed  their 
columns  against  the  arguments  of  even  the  most  eminent  economists  who  advocate 
a  State  issue  of  paper  money. 


APPENDIX    II. 


VIEWS  OF  EMINENT  AMERICAN  STATESMEN  AND  ECONOMISTS  OP 
PAST  GENERATIONS  ON  THE  RIGHTS  OF  THE  NATION  TO  ISSUE 
PAPER    MONEY,   AND   POSSESS    ITS    PROFITS. 

I.  Mr.  Jefferson's   Views. 

The  views  of  Mr.  Jefferson  are  all  the  more  valuable,  in- 
asmuch as  he  took  a  prominent  part  in  framing  the  Consti- 
tution of  the  United  States. 

In  vol.  vi.  of  his  "Letters  to  Mr.  Eppes,"  Mr.  Jefferson 
says,  — 

"  In  the  Revolutionary  War  of  the  old  Congress,  the  States  is- 
sued bills  without  interest  and  without  taxes.  They  occupied  the 
channels  of  circulation  very  freely,  till  those  channels  were  over- 
flowed by  an  excess  beyond  all  calls  of  circulation.  But  though  we 
have  so  improvidently  suffered  the  field  of  circulating  medium  to 
be  filched  from  us  by  private  individuals,  yet  I  think  we  may  re- 
gain it." 

At  p.  140  he  expresses  himself  very  decidedly:  — 

"  Bank  paper  must  be  suppressed,  and  the  circulation  restored 
to  the  nation,  to  whom  it  belongs." 

Mr.  Jefferson,  in  using  the  words,  "the  States  issued 
bills,"  etc.,  meant  the  "  Congress  of  the  States,"  and  not 
individual  States.  The  last  quoted  paragraph  is  perfectly 
explicit  in  saying,  "the  circulation"  must  be  "restored  to 
the  nation."  His  idea  was,  that  "  Treasury  bills  bottomed  on 
taxes,  bearing  or  not  bearing  interest,  as  may  be  found  neces- 
sary, thrown  into  circulation,  will  take  the  place  of  so  much 
gold  and  silver,  which  last,  when  crowded,  will  find  an  efflux 
in  other  countries,  and  thus  keep  the  quantity  of  medium  at 

its  salutary  level." 

299 


300  *     CURRENCY. 

At  p.  199  he  says  of  this  government  paper  money, — 

"  If  their  credit  falter  "  (that  is,  the  national  notes),  "  open  pub- 
lic loans,  of  which  the  bills  alone  shall  be  received  as  specie.  Let 
banks  continue,  if  they  please ;  but  let  them  discount  for  cash 
alone  in  every  other  country  on  earth,  except  Great  Britain  and 
her  too  often  unfortunate  copyist,  the  United  States." 

2.  Mr.  Calhoun's   Views 

are  well  expressed  in  the  following  extracts  from  several  of 
his  speeches.  It  is  proper  to  explain  that  Mr.  Calhoun  was 
chairman  of  a  select  committee  of  the  House  of  Repre- 
sentatives which  reported  the  first  bill  for  incorporating  the 
Bank  of  the  United  States  during  the  session  of  1816,  when 
the  paper  currency  was  in  a  very  unsatisfactory  condition. 
He  favored  the  plan  of  a  national  bank  then,  as  he  many 
times  afterwards  explained,  not  because  he  considered  it 
the  best  method  of  supplying  "a  sound  paper  currency  of 
uniform  value  throughout  the  Union,"  but  because  at  the 
time  "  it  was  the  only  one  that  was  possible  "  to  get  through 
Congress.  His  speech  in  support  of  this  bill,  delivered 
Feb.  26,  1 816,  is  a  very  excellent  exposition  of  the  true  prin- 
ciples of  monetary  science ;  and  he  strongly  insisted  on  the 
necessity  of  making  paper  money  convertible,  under  all 
circumstances,  into  metallic  money,  and,  at  the  same  time, 
graphically  pointed  out  the  evils  of  a  depreciated  and  fluc- 
tuating "medium  of  exchange."  At  p.  157,  vol.  ii.  of  his 
works,  he  says,  — 

"  We  have  in  lieu  of  gold  and  silver  a  paper  medium,  une- 
qually, but  generally,  depreciated,  which  affects  the  trade  and 
industry  of  the  country;  which  paralyzes  the  national  arm  ;  which 
sullies  the  faith,  both  public  and  private,  of  the  United  States,  —  a 
medium  no  longer  resting  on  gold  and  silver  as  its  basis." 

He  mentions  the  significant  fact  that  the  banks  and  bank- 
ing capital  had  increased  from  the  one  State  bank  of  "  North 
America,"  at  the  period  when  the  Constitution  was  framed, 
with  its  $400,000  of  capital,  to  260  similar  banks,  with  a 
gross  capital  of  $80,000,000,  and  a  circulation  of  about  a  like 
amount,  when  there  was  barely  $15,000,000  of  specie  in  the 


API'ENIUX. 


3d 


country,  and  the  bulk  of  that  held  on  government  account. 
It  seems  a  pity  that  Mr.  Calhoun,  with  such  clear  percep- 
tions of  sound  principles,  felt  compelled  to  yield  to  expedi- 
ency. 

Mr.  Webster,  then  a  member  of  the  House  of  Repre- 
sentatives, strenuously  opposed  the  bill  reported  by  Mr. 
Calhoun,  which,  eighteen  years  later,  he  moved  to  extend, 
when  the  Act  was  about  to  expire  by  effluxion  of  time. 
By  this  time  (1834)  the  two  life-long  opponents  had  changed 
positions  on  this  measure;  and  we  find  Mr.  Calhoun  and 
Mr.  Webster  face  to  face  in  the  Senate  of  the  United 
States,  the  former  arguing  against  the  Webster  bill  for  the 
extension  of  the  bank  charter.  I  will  quote  one  illustration 
given  by  Mr.  Calhoun  of  the  scientific  principles  of  paper 
money,  as  applicable  to  the  discussions  of  the  present  day 
as  it  was  then. 

"If,"  said  Mr.  Calhoun,  "we  take  the  aggregate  property 
of  a  community,  that  which  forms  the  currency  constitutes 
in  value  a  very  small  proportion  of  the  whole.  What  this 
proportion  is  in  our  country,  and  other  commercial  and 
trading  communities,  is  somewhat  uncertain.  I  speak  con- 
jecturally  in  fixing  it  at  one  to  twenty-five  or  thirty,  though 
I  presume  this  is  not  far  from  the  truth ;  and  yet  this  very 
small  proportion  of  the  property  of  the  community  regulates 
the  value  of  all  the  rest,  and  forms  the  medium  of  circula- 
tion by  which  all  its  exchanges  are  effected."  This  was  a 
pretty  good  guess  at  the  amount  of  money  of  all  kinds  used 
in  comparison  with  the  gross  amount  of  capital,  or  trading 
power,  actually  employed  in  conducting  the  industries  of 
the  people,  which  we  now  know  from  actual  analysis  (vide 
postulate  32).  In  a  subsequent  speech  (183S)  he  raises  his 
estimate  to  thirty  to  thirty-five  per  cent.  This  proportion 
has  no  doubt  materially  diminished  since  1834,  when  Mr. 
Calhoun  made  his  speech,  caused  by  the  more  rapid  transit 
and  distribution  of  the  products  of  labor,  and  the  improved 
methods  of  banking  and  clearing  houses.  I  quote  another 
example  given  by  Mr.  Calhoun,  at  p.  347  of  the  same  vol- 
ume, as  illustrative  of  the  principles  of  money. 

"  If  we  turn  our  attention,"  he  says,  "  to  the  laws  which 


7,02  CURRENCY. 

govern  the  circulation,  we  shall  find  one  of  the  most  impor- 
tant to  be,  that,  as  the  circulation  is  decreased  or  increased, 
the  rest  of  the  property  will,  all  other  circumstances  remain- 
ing the  same,  be  decreased  or  increased  in  value  exactly  in 
Lthe  same  proportion.  To  illustrate  :  if  a  community  have 
an  aggregate  amount  of  property  of  $31,000,000,  of  which 
$1,000,000  constitutes  its  currency,  and  that  $1,000,000 
should  be  reduced  one-tenth  part,  that  is  to  say,  $100,000, 
the  value  of  the  rest  will  be  reduced  in  like  manner,  one- 
tenth  part,  that  is,  $3,000,000." 

In  other  words,  '"the  trading  power  of  currency  is  in  the 
inverse  ratio  of  its  volume,  all  other  things  being  equal"  (vide 
postulate  4).  If  the  volume  of  money  be  increased,  its 
trading  power  diminishes ;  and  the  prices  of  commodities 
and  labor  will  appear  to  have  risen.  If,  from  any  cause,  the 
volume  is  diminished,  the  price  of  goods  and  labor  will 
appear  to  have  fallen. 

All  those  who  quote  Mr.  Calhoun's  arguments  in  favor 
of  a  national  issue  of  paper  money,  —  which  are  sound  and 
unanswerable,  —  and  attempt  to  apply  them  in  support  of 
an  inconvertible  paper  currency,  will  do  well  to  give  heed 
to  what  he  said  on  that  subject.     Here  it  is:  — 

"With  these  convictions,  and  entertaining  a  deep  conviction 
that  an  unfixed,  unstable,  and  fluctuating  currency  is  to  be  ranked 
among  the  most  fruitful  sources  of  evil,  whether  viewed  politically 
or  in  reference  to  the  business  transactions  of  the  country,  I  can- 
not give  my  consent  to  any  measure  that  does  not  place  the  cur- 
rency on  a  sound  foundation." 

This  speech  of  1834  discloses  the  fact  that  the  banks 
had  increased,  from  260,  in  181 6,  with  a  capital  of  about 
$80,000,000,  to  450,  in  eighteen  years,  with  a  gross  capital 
of  $145,000,000,  and  a  corresponding  increase  of  circulation, 
but  no  increase  of  metal  behind  the  notes,  and  nearly  all  of 
which  was  then  held  by  the  Bank  of  the  United  States. 

In  another  speech,  vol.  iii.  p.  in,  referring  to  the  state 
of  things  at  the  close  of  the  war  with  Great  Britain,  he  re- 
marks, — 

"  Specie  payments  were  coerced,  with  us,  by  the  establishment 


APPENDIX.  303 

of  the  Bank  of  the  Uuitcd  States,  and  a  few  years  afterwards  in 
Great  Britain  by  an  Act  of  Parliament.  In  both  countries  the 
restoration  was  followed  by  wide-spread  distress,  as  it  always  must 
be  when  effected  by  coercion  ;  for  the  simple  reason  that  banks 
cannot  pay  unless  their  debtors  first  pay,  and  ih.it  to  coerce  the 
banks  compels  them  to  coerce  their  debtors  before  they  ha. 
means  to  pay.  Their  failure  must  be  the  consequence;  and  this 
involves  the  failure  of  the  banks  themselves,  carrying  with  it  uni- 
versal distress.  Hence  I  am  opposed  to  all  kinds  of  coercion,  and 
am  in  favor  of  leaving  the  disease  to  time,  and  the  action  of  public 
sentiment  and  the  States,  to  whom  banks  are  alone  responsible.'1'' 

Mr.  Calhoun  did  not  perceive  the  primary  cause  for  the 
distress  produced  by  contraction,  but  mistook  what  is  in 
reality  an  effect  for  such  cause.  The  "distress"  in  such 
cases  results  from  the  circumstance  that  trade  to  a  large 
degree  is  conducted  on  mere  "  margins,"  or  capitals,  of  only- 
ten  or  fifteen  per  cent  of  the  credit  involved,  and  hence  the 
shrinkage  in  value  of  a  currency  of  ten  or  fifteen  per  cent 
brings  ruin  on  a  large  class.  I  could  epiote  much  more  from 
Mr.  Calhoun's  numerous  speeches  on  the  currency7,  to  show 
how  strongly  he  argued  in  favor  of  a  convertible  currency, 
but  must  refer  to  his  speeches  for  such  arguments.  There 
are  other  good  arguments  relating  to  the  principles  of  cur- 
rency in  his  works,  that  are  too  valuable  to  omit.  At  p.  240, 
vol.  iii.  of  his  works  (speech,  Feb.  15,  1838),  he  very  forci- 
bly remarks,  — 

"  I  hold  sound,  stable  currency  to  be  among  the  greatest  encour- 
agements to  industry  and  business  generally  ;  and  an  unsound  and 
fluctuating  —  now  expanding  and  now  contracting,  so  that  no  hon- 
est man  can  tell  what  to  do  —  as  among  the  greatest  discourage- 
ments. The  dollar  and  the  eagle  are  the  measure  of  value,  as  the 
yard  and  the  bushel  are  of  quantity  ;  and  what  would  we  think  of 
the  incorporation  of  companies  to  regulate  the  latter,  —  to  expand, 
or  contract,  or  shorten,  or  lengthen  them  at  pleasure,  with  the 
privilege  to  sell  by  the  contracted,  or  shortened,  and  buy  by  the 
expanded,  or  lengthened  ?  .  .  .  But  I  go  farther,  and  assert  confi- 
dently that  the  excess  of  paper,  as  well  as  of  its  unsteadiness,  is 
unfavorable  to  the  business  and  industry  of  the  country." 

In  his  speech  of  March  22,  1838,  he  declares, — 

"  I  now  undertake  to  affirm  positively,  and  without  the  least  fear 


304  CURRENCY. 

that  I  can  be  answered,  what  heretofore  I  have  but  suggested, — 
that  a  paper  issued  by  Government  with  the  simple  promise  to 
receive  it  in  all  its  dues,  leaving  its  creditors  to  take  it  or  gold  and 
silver,  at  their  option,  would,  to  the  extent  that  it  would  circulate, 
form  a  perfect  circulation,  which  could  not  be  abused  by  the  Govern- 
ment, and  would  be  as  steady  and  uniform  in  value  as  the  metals 
themselves." 

Again  he  says  (vol.  iii.  pp.  123,  124),  on  the  same  page 
(vol.  iii.  p.  306),  — 

"  If  I  were  to  go  into  the  legality  of  such  a  currency,  I  would  be 
able  to  prove  that  it  is  within  the  constitutional  power  of  Congress 
to  use  such  a  paper  in  the  management  of  its  finances,  according 
to  the  most  rigid  rule  of  construing  the  Constitution;  and  that 
those,  at  least,  who  think  that  Congress  can  authorize  the  notes 
of  State  corporations  to  be  received  in  public  dues,  are  estopped 
from  denying  its  right  to  receive  its  own  paper." 

I  shall  close  these  extracts  from  Mr.  Calhoun's  speeches 
with  a  few  selected  indiscriminately,  which  seem  to  have 
merit,  and  a  bearing  on  the  currency  question,  now  under 
agitation  in  America. 

Of  the  advantages  of  a  national  over  a  bank  currency,  he 
said,  — 

"  It  is  a  striking  advantage  over  bank  circulation  in  its  supe- 
rior cheapness  as  well  as  greater  stability  and  safety.  Bank  paper 
is  cheap  to  those  who  make  it,  but  dear  —  very  dear  —  to  those 
who  use  it,  —  fully  as  much  so  as  gold  and  silver.  It  is  the  little 
cost  of  its  manufacture,  and  the  dear  rates  at  which  it  is  furnished 
to  the  community,  which  give  the  great  profit  to  those  who  have 
a  monopoly  of  the  article.  ...  On  the  other  hand,  the  credit  of 
the  Government,  while  it  would  greatly  facilitate  its  financial  opera- 
tions, would  cost  nothing,  or  next  to  nothing,  both  to  it  and  the 
people,  and  of  course  would  add  nothing  to  the  cost  of  production, 
which  would  give  every  branch  of  our  industry,  —  agriculture,  com- 
merce, and  manufactures,  —  as  far  as  its  circulation  might  extend, 
great  advantages  both  at  home  and  abroad." 

"  It  appears  to  me,  after  bestowing  the  best  reflection  I  can 
give  the  subject,  that  no  convertible  paper  —  that  is,  no  paper 
whose  credit  rests  on  a  promise  to  pay  —  is  suitable  for  currency. 
It  is  the  form  of  credit  proper  in  private  transactions  between  man 
and  man,  but  not  for  a  standard  of  value  to  perform  exchanges 


APPENDIX. 


305 


generally,  which  constitutes  the  appropriate  functions  of  money  or 
currency." 

"  No  one  can  doubt  but  that  the  Government  credit  is  better 
than  that  of  any  bank,  —  more  stable,  more  safe.  Why,  then, 
should  it  mix  up  with  the  less  perfect  credit  of  those  institutions? 
Why  not  use  its  own  credit  to  the  amount  of  its  own  transactions? 
.  .  .  And  why  should  the  community  be  compelled  to  give  six  per 
cent  discount  for  the  Government  credit  blended  with  that  of  the 
banks,  when  the  superior  credit  of  the  Government  could  be  fur- 
nished separately,  without  discount,  to  the  mutual  advantage  of  the 
Government  and  the  community  ?  " 

3.    Views  and  Opinions  of  Daniel  Webster. 

Mr.  Webster's  utterances  on  the  right  of  the  nation  to 
issue  paper  currency  are  particularly  noteworthy,  as  coming 
from  America's  greatest  statesman  and  lawyer,  and  from  the 
circumstance  that  he  belonged  to  an  opposite  school  of  poli- 
ticians from  that  of  Messrs.  Jefferson  and  Calhoun.  The 
point  of  difference  between  the  two  schools  of  his  time  on 
the  currency  related  to  the  question  of  the  right  of  Congress 
to  make  treasury  notes  "  legal  tender,''''  to  which  he  took  ex- 
ceptions. -""■" 

In  his  speech  on  "The  Specie  Circular  "  issued  by  Presi- 
dent Jackson's  government,  delivered  Dec.  21,  1836  (see 
his  "  Speeches,"  vol.  iv.  p.  271),  he  says, — 

"  Most  unquestionably  there  is  no  legal  tender ;  and  there  can 
be  no  legal  tender  in  this  country  under  the  authority  of  this  Gov- 
ernment or  any  other,  but  gold  and  silver,  either  the  coinage  of 
our  own  mints,  or  foreign  coins  at  rates  regulated  by  Congress. 
This  is  a  constitutional  principle,  perfectly  plain,  and  of  the  very 
highest  importance.  The  States  are  expressly  prohibited  from 
making  any  thing  but  gold  and  silver  a  tender  in  payment  of  debts ; 
and  although  no  such  express  prohibition  is  applied  to  Congress, 
yet  as  Congress  has  no  power  granted  to  it  in  this  respect,  but  to 
coin  money  and  regulate  the  value  of  foreign  coins,  it  clearly  has 
no  power  to  substitute  paper,  or  any  thing  else  but  coin,  as  a  tender 
in  payment  of  debts  and  in  discharge  of  contracts." 

On  the  other  hand,  Mr.  Webster  insisted  with  great  force 
on  the  right  of  Congress  to  issue  treasury  notes,  and  make 
them  legal  tender  in  payment  of  all  national  taxes.    Whether 


306  currency. 

equally  logical  reasoners  may  not  think  that  Mr.  Webster 
did  not,  after  all,  do  a  little  hair-splitting  for  party  ends,  in 
drawing  this  nice  distinction  between  making  national  notes 
legal  tender  for  debts  due  the  nation,  and  denying  the  right 
of  Congress  to  extend  that  quality  in  dealings  between  man 
and  man,  is  a  question  open  for  consideration.  But  if  the 
notes  issued  by  the  nation  are  guaranteed  convertibility  into 
legal-tender  coin,  and  are  not  legal  tender  as  between  the 
Government  and  the  public,  it  is  of  no  real  consequence 
whether  they  can  or  can  not  be  made  by  Congress  legal 
tender  in  payment  of  debts  generally.  He  says  in  the  same 
speech, — 

"  But  when  Congress  lays  duties  and  taxes,  or  disposes  of  the 
public  lands,  it  may  direct  payment  to  be  made  in  whatever  medium 
it  pleases".  The  power  to  lay  taxes  includes  the  power  of  deciding 
how  they  shall  be  paid;  and  the  power  granted  by  the  Constitution 
to  dispose  of  the  territory  belonging  to  the  United  States  carries 
with  it,  of  course,  the  power  of  fixing,  not  only  the  price  and  the 
conditions  and  time  of  payment,  but  also  the  medium  of  payment." 

At  p.  2S1  (same  vol.),  he  says, — 

"  I  admit  that  a  currency  composed  partly  of  bank  notes  has 
always  a  liability,  and  often  a  tendency,  to  excess,  and  that  it  re- 
quires the  constant  care  and  oversight  of  government. 

"  I  am  of  the  opinion  that  even  convertibility  of  bank  notes  into 
gold  and  silver,  although  it  be  a  necessary  guard,  is  not  an  absolute 
security  against  occasional  excess  of  paper  issues." 

The  following  extract  (p.  284)  shows  that  Mr.  Webster 
was  not  always  careful  to  distinguish  between  money,  the 
tool  and  measure  of  values,  and  capital,  of  which  it  is  only 
an  insignificant  part :  — 

"  With  great  general  prosperity,  good  crops  generally  speaking, 
an  abundance  of  the  precious  metals,  and  a  favorable  state  of  the 
foreign  exchanges,  men  of  business  have  yet  felt  for  some  months 
an  unprecedented  scarcity  of  money." 

Most  clearly  Mr.  Webster  meant  that  capital,  or  loans, 
were  then  scarce,  otherwise  his  language  is  nonsense.  Only 
a  few  months  later  the  great  financial  and  business  collapse 
took  place,  followed  by  the  long-continuing  crises   lasting 


APPENDIX.  307 

over  five  years.  The  fatal  year  1837  was  then  "casting  its 
shadows  before  it ;  "  and  the  time  was  near,  when,  as  Dickens 
expressed  it,  "there  was  no  money,  absolutely  no  money." 
Then  it  was  the  nation  should  have  stepped  boldly  in,  and 
issued  currency  notes  in  moderate  amounts,  to  fill  the  place 
of  the  exploded  and  trashy  bank  issues.  Mr.  Webster 
pointed  out  that  the  Government,  having  a  surplus  revenue, 
had  locked  up  all  the  specie  in  its  various  depositories.  What 
the  Government  could  have  done,  was  to  have  suspended  the 
collection  of  taxes,  which  would  have  been  an  immense  relief 
to  the  commerce  and  industries  of  the  country,  and  issued 
paper  money  convertible  on  demand  for  all  its  requirements. 
Thus  the  opportunity  would  have  been  given  to  set  such 
money  afloat.  But  it  might  have  done  more.  It  might 
have  undertaken  some  large  public  improvements,  —  such  as 
canals,  railways,  just  then  coming  prominently  into  vogue, 
or  even  common  "post  roads,"  —  and  thus  to  have  got  out 
$100,000,000  of  paper  money  to  in  part  recoup  the  $140,000 
of  those  beautifully  engraved,  but  valueless,  notes  of  exploded 
banks.  It  will  be  borne  in  mind,  that  there  was  at  this  time 
a  large  accumulation  of  public  funds,  and  the  question  had 
been  what  to  do  with  it. 

But  let  me  quote  Mr.  Webster's  reasons  for  the  condition 
of  things  he  describes  :  — 

"  The  agricultural  State  of  Indiana,  for  example  "  (p.  285),  "  is 
full  of  specie :  the  highly  commercial  State  of  Massachusetts  is 
nearly  drained.  In  the  mean  time  the  money  in  Indiana  cannot  be 
used.  It  is  waiting  for  the  new  year.  The  moment  the  Treasury 
grasp  is  let  loose  from  it,  it  will  tend  again  to  the  great  centres 
of  business;  that  is  to  say,  the  restoration  of  the  natural  state 
of  things  will  begin  to  correct  the  evil  of  arbitrary  and  artificial 
financial  arrangements." 

Mr.  Webster  did  not  clearly  perceive  that  the  great  finan- 
cial operations  of  the  world  were  no  longer  carried  on  with 
either  metallic  or  paper  money,  however  important  a  role 
they  have  to  perform,  but  by  bills  and  other  securities  given 
in  payment  of  goods,  which  are  turned  by  bankers  into  trad- 
ing power.  He  did,  however,  great  justice  to  his  knowledge 
of   the  fundamental  principles  of   monetary  science,  when 


308  CURRENCY. 

he  laid  down  in  his  speech  delivered  in  the  United  States 
Senate  on  the  28th  September,  1837,  four  months  after  the 
great  crisis  had  set  in,  the  following  broad  proposition, 
which  I  have  set  down  amongst  the  postulates  (34) :  — 

"  It  is  the  constitutional  duty  of  Government  to  see  that  a  proper 
currency,  suitable  to  the  circumstances  of  the  times  and  the  wants 
of  trade  and  business,  as  well  as  to  the  payment  of  the  debts  due 
to  the  Government,  be  maintained  and  preserved,  —  a  currency  of 
general  credit,  and  capable  of  aiding  the  operations,  so  far  as  these 
operations  may  be  conducted  by  means  of  the  circulating  medium  ; 
and  that  these  are  duties,  therefore,  devolving  on  Congress  in  rela- 
tion to  currency  beyond  the  mere  regulation  of  the  gold  and  silver 
coins." 

The  Italics  in  this  proposition  are  mine,  as  the  language 
is  very  expressive  and  explicit.  All  other  Italicized  passages 
are  Mr.  Webster's  own.     In  another  sentence  he  says, — 

"  I  admit  at  once,  that,  if  the  currency  is  not  to  be  preserved  by 
the  Government  of  the  United  States,  I  know  not  how  it  is  to  be 
guarded  against  constantly  occurring  disorders  and  derangements." 

Again  he  says,  — 

"  I  wish  it  to  be  observed,  that  I  am  now  contending  only  for 
the  general  principle,  and  not  insisting  on  the  constitutionality  or 
expediency  of  any  particular  means  or  any  particular  agent." 

In  support  of  his  views,  Mr.  Webster  refers  to  President 
Madison's  recommendation  to  Congress,  in  his  message  of 
Dec.  5,  1  Si 5,  to  issue  treasury  notes.  I  therefore  quote  what 
Mr.  Madison  then  said:  — 

4.    Views  of  Mr.  Madison  on  the  Right  of  the  Nation  to 
isstie  Paper  Money. 

"  The  absence  of  the  precious  metals  will,  it  is  believed,  be  a 
temporary  evil ;  but,  until  they  can  again  be  rendered  as  a  general 
medium  of  exchange,  it  devolves  on  the  wisdom  of  Congress  to 
provide  a  substitute,  which  shall  equally  engage  the  confidence, 
and  accommodate  the  wants,  of  the  citizens  throughout  the  Union. 
If  the  operations  of  the  state  banks  cannot  produce  this  result,  the 
probable  operations  of  a  national  bank  will  merit  consideration; 
and,  if  neither  of  these  expedients  be  deemed  effectual,  it  may  be 


APPENDIX.  309 

necessary  to  ascertain  the  terms  upon  which  the  notes  of  the  Gov- 
ernment (no  longer  required  as  an  instrument  of  credit)  shall  be 
issued  on  motives  of  general  policy,  or  as  a  common  medium  of 
circulation." 

On  this  express  recognition  by  President  Madison,  Mr. 
Webster  remarks,  — 

"  Here,  sir,  is  the  express  recommendation  to  Congress  to  pro- 
vide a  national  currency  "  (these  words  are  emphasized  by  Mr. 
Webster  himself),  "a  paper  currency,  a  uniform  currency,  for  the 
use  of  the  community,  as  a  substitute  for  the  precious  metals,  and 
as  a  medium  of  exchange." 

At  p.  350  Mr.  Webster  spoke  almost  prophetically  of  the 
times  in  which  we  live.  He  says,  "  I  was  beside  the  Ohio 
River  on  a  journey,  when  I  heard  of  the  suspension  of  the 
banks,  and  had  occasion  frequently  to  express  the  opinion  I 
am  now  maintaining  :  "  — 

"  That  a  new  era  had  commenced  ;  that  a  question  of  principle, 
and  a  question  of  the  highest  importance,  had  arisen,  or  would 
immediately  arise  ;  that  hereafter  the  dispute  would  not  be  so  much 
about  means  as  about  ends;  that  the  extent  of  the  constitutional 
obligations  of  the  Government  would  be  controverted ;  in  short,  that 
the  question  tuhether  it  was  the  duty  of  Congress  to  concern  itself 
with  the  national  currency  MUST  INEVITABLY  BECOME  THE  LEAD- 
ING OBJECT  OF  THE  TIMES." 

The  last  words  were  emphasized  by  Mr.  Webster  himself, 
and  the  "times  "  he  referred  to  seem  to  have  arrived.  The 
apprehension  of  the  author  is,  that  the  inflationists  may  ruin 
the  efforts  of  those  who  desire  to  have  the  currency  question 
settled  on  a  sound  and  durable  basis.  The  pro-bank  parti- 
sans are  using  it  to  great  advantage  to  frighten  men  of 
property  —  the  great  mass  of  whom  are  either  interested  in 
banks  or  ignorant  of  the  principles  of  money  —  into  exert- 
ing their  influence  against  a  national  paper  circulation. 


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